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 pre-qualify 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 a wall and ceiling contractor after watching an ambulance leave a home under construction? How would your clients react to a newspaper headline announcing the death of a drywall installation worker 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 (Report A-3, “Improving Construction Safety Performance”) of construction accident costs. The objectives of the study 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 pre-qualification 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.
When Insurance Rates Go Up
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 contractors based insurance factors.
A base premium is calculated as follows: Base Premium = Payroll x Base Rate/$100 Salary x EMR.
The total payroll is first multiplied by the Base Rate. Your Base Rate is a number established by the state-rating bureau for the type of work being performed (dry wall applicator, plasterer, etc.). This number is then multiplied by your EMR. EMR is the 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 1, the employer’s losses are greater than the average. If the employer’s EMR is less than one, losses are less than average, and the result is lower premiums.
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 opposite ends of the spectrum. Given a payroll of $1,000,000, base rate of $17/$100 salary, the contractor at 0.50 or will have a premium of $85,000. The contractor at 2.05 will have a premium of $348,500. Using the fact that the current year’s losses will affect the future premium, a projection may be made allowing you to adjust your bids to reflect a more accurate estimate of anticipated labor costs.
How to Estimate Accident Costs
In the same way, indirect accident costs can also be estimated for the coming year. These projections may significantly influence the bidding process. Review your company’s injury and illness history. Identify potential hazards in the upcoming project. Project possible incidents and indirect costs. Depending on the type of accident, the ratio between indirect and direct costs can vary from 4:1 to 17:1. However, the Occupational Safety and Health Administration has developed an interactive software application, “$afety Pays” (see OSHA’s 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. The Business 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 programs 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 safety and health program of 8 percent:2.5 percent or 3.2:1.
Whether you use this ratio in your bids or apply your calculated safety program costs and the accident losses projections using OSHA’s $afety Pays, it is critical that safety be a part of the bid process. In fact, as mentioned earlier, it may be a pre-qualifier. The Business Roundtable not only provided the statistics on costs and savings, it offered recommendations to host employers for pre-qualifying contractors. The criteria included the following:
• OSHA incidence rates for recordable injuries and illnesses.
• Experience modification rates for workers’ compensation insurance.
• Contractor safety attitudes and practices.
Host employers (building owners) know wall and ceiling 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 pre-qualification is the Recordable Incident Rate. 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 using this formula: Number of incidents x 200,000 hours/Number of hours employees worked = Recordable Incidence Rate.
Employers generally like to see numbers below the national average. The RIR for construction in 2004 was 6.4. The figure for drywall and insulation construction was 7.5. The national standard holds true for the EMR figures. Contractors should be better than average. An EMR of less than 1 is preferred.
Last, But Certainly Not Least
The final measurement is the contractor’s safety attitudes and practices. Host employers look for management accountability for safety. The Business Roundtable study generated a pre-qualification 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 contractors’ safety attitudes and practices and efforts to ensure safety on the job are the heart of the whole study. 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 and is still used as the basis for the Construction Users Roundtable’s Construction Industry Safety Excellence Awards Program. Past award winners like ExxonMobil, Merck and Company Inc. and Air Products and Chemicals credit their success to measuring contractors by the standards set in the report.
About the Author
Joe O’Connor is with Intec, Inc., Waverly, Pa. He can be reached at (800) 745.4818.
For More Information
AWCI currently has a safety software application available to members. The AWCI Safety Software provides users with the administrative tools needed to develop, implement and maintain an effective safety program. The application includes required documentation, training and recordkeeping modules. Workshops will be provided at the request of participating Chapters. The workshops are designed to train administrative personnel and management in the use and application of the software. For more information, visit the AWCI Web site, www.awci.org, or call (703) 538.1600.