Safety professionals always preach the value of an effective accident-prevention program. It saves lives, lowers accident costs and prevents fines for noncompliance with safety regulations. While these factors certainly command our attention, they typically take a back seat to estimating and production. Many contractors don't realize the role safety plays in the contract-award process. Understanding the impact safety has on operating costs, bid preparation and sales will assist you in securing future contacts.
The safety record is often used to prequalify a company in the bidding process. This can occur with or without the contractor's knowledge. Whether the host employer is a homeowner or a Fortune 500 company, no one likes the idea of hiring a dangerous contractor. How many neighbors would consider hiring an electrical contractor after watching an ambulance leave a home? How would your clients react to a newspaper headline announcing the death of an electrician at their facility? The reputation of being an unsafe organization will cost you sales.
To reduce the risk of hiring poor safety performers, the Construction Users Roundtable (formerly the Business Roundtable) conducted a study of construction accident costs (Report A-3, “Improving Construction Safety Performance”). The study's objectives were to provide an economic incentive for owners to work with contractors, develop methods for evaluating contractor safety performance and identify safety requirements contractors need to have in place.
At the time of the study, it was shown that accident costs accounted for 6.5 percent of the dollars spent by users of industrial, utility and commercial construction. It also determined that these costs could be reduced. This fulfilled its objectives, including the establishment of prequalification criteria for contractors. A hidden benefit to safe contractors was the ability to use the cost calculations in their bids.
The accident costs cited by the study included direct and indirect costs. Basically, these are the insured and uninsured costs. The direct costs are medical costs and workers' compensation premiums, liability and property losses. Indirect accident costs are reduced productivity, delays in project schedules, administrative time and damage to equipment and the facility.
Most contractors realize that insurance rates increase due to accidents. However, a better understanding of this may help in bid calculations. It will also explain standards set by host employers and general contractor-based insurance factors.
A base premium is calculated as follows:
Base Premium = Payroll * Base Rate/$100 Salary * EMR.
First, multiply the total payroll by the base rate. Your base rate is a number established by the state-rating bureau for the type of work being performed (electrician, fiber optic installer, etc.). This number is then multiplied by your EMR (experience modification rate). It is a number based on the employer's safety record. It compares your losses to other employers in the same industry. If the EMR is greater than one, the employer's losses are greater than the average. If the employer's EMR is less than one, losses are less than average. Lower premiums will result.
The study revealed that EMRs across the nation varied from 0.50 to 2.05. Consider this variable in your bid. Look at the difference in costs for two contractors with the same payroll but EMRs at either end of the spectrum. Given a payroll of $1,000,000, base rate of $17/$100 salary, the contractor at 0.50 will have a premium of $85,000. The contractor at 2.05 will have a premium of $348,500.
Using the fact that the current year's losses will affect the future premium, a projection may be made allowing you to adjust your bids to reflect a more accurate estimate of anticipated labor costs.
In the same way, indirect accident costs can also be estimated for the coming year. These projections may significantly influence the bidding process. Review your company's injury and illness history. Identify potential hazards in the upcoming project. Project possible incidents and indirect costs. Depending on the type of accident, the ratio between indirect and direct costs can vary from 4-to-1 to 17-to-1.
However, OSHA has developed an interactive software application, “$afety Pays” (see the OSHA Web site at www.osha.gov/dts/osta/oshasoft/safetwb.html), to assist employers in assessing the indirect costs of accidents. The application uses a company's profit margin, the average costs of an injury or illness and an indirect-cost multiplier to project the amount of sales a company would need to generate in order to cover those costs.
As demonstrated, it is easy to quantify many of the costs associated with accidents. In contrast to the insured and uninsured costs, the cost of developing and implementing a safety and health program is not as concrete. However, fairly accurate projections can be made to help you determine a return on investment (ROI).
The Construction Users Roundtable data showed that safety programs typically cost about 2.5 percent of direct labor costs. This includes safety, medical and clerical personnel, safety meetings, inspection of tools and equipment, orientation sessions, site inspections, personal protective equipment, health equipment such as respirator, fit tests and miscellaneous supplies and equipment.
The savings observed in the study, which compared national average losses to the losses of companies with safety programs, was a reduction of 8 percent. This yields a ratio of savings to the cost of administering a safety and health program of 8 percent to 2.5 percent or 3.2-to-1.
Whether you use this ratio in your bids or apply your calculated safety program costs and the accident losses projections using “$afety Pays,” it is critical that safety be a part of the bid process. In fact, as mentioned earlier, it may be a prequalifier. The Construction Users Roundtable not only provided the statistics on costs and savings, it offered recommendations to host employers for prequalifying contractors. The criteria included the following:
o OSHA incidence rates for recordable injuries and illnesses
o Experience modification rates for workers' compensation insurance
o Contractor safety attitudes and practices
Host employers know electrical contractors with more than 10 employees must maintain injury and illness records for OSHA and may ask for rates based on these reports. A common OSHA rate used for prequalification is the recordable incident rate (RIR).From the data on OSHA Form 300 or 300A, Log and Summary of Work-related Injuries and Illnesses, a calculation can be made to determine the RIR (see formula below).
No. of incidents * 200,000 hours/No. of hours employees worked = Recordable Incidence Rate (RIR).
Employers generally like to see numbers below the national average. The RIR for construction in 2003 was 6.8. The figure for electrical construction was 6.2. The national standard holds true for the EMR figures. Contractors should be better than average. An EMR of less than one is preferred.
The final measurement is the contractor's safety attitudes and practices. Host employers look for management accountability for safety. The Construction Users Roundtable study generated a prequalification form that included questions on accident reporting and review procedures, inspections, written program elements and training and safety meetings. Each question asked about management involvement (field superintendent, vice president of construction, president of firm) and the frequency distribution of the information.
In effect, the contractor's safety attitudes and practices are the heart of the whole study and efforts to ensure safety on the job. The statistics will fall into place and continue to do so. The A-3 Report “Improving Construction Safety Performance” originally came out in 1979. It was reprinted in 1990. It is still used as the basis for the Construction Users Roundtable's Construction Industry Safety Excellence (CISE) Awards Program. The 2004 award winners, including ExxonMobil, Merck and Co. Inc. and Air Products and Chemicals, credit their success to measuring contractors by the standards set in the report. EC
O’CONNOR is with Intec, a safety consulting, training and publishing firm that offers on-site assistance and produces manuals, training videos and software for contractors. Based in Waverly, Pa., he can be reached at 607.624.7159 or email@example.com.