The direct and indirect accident costs represent the “benefits” (money saved) if we adopt the recommended actions. The benefits are realized because we will not have to pay the costs over the foreseeable future. To help estimate direct and indirect costs, you can use OSHA’s Safety Pays software. This is an excellent software tool that determines direct and indirect accident costs. It also calculates the business volume required to cover those costs. The data is based on 52,000 lost-time claims submitted to a major workers compensation insurance carrier.
What is the ratio between indirect (uninsured) and direct (insured) costs in your scenario?
The indirect costs for accidents will usually be greater than the direct costs. Indirect costs can range from 1 to 20 times greater than the direct costs, depending on the severity of the injury. For every $1 spent in direct costs, you’ ll pay an additional $1 to $20 in indirect costs. To determine the ratio between the indirect and direct costs, use the following equation:
Indirect Costs / Direct Costs = ___ to 1
Let’s say an employee injured his hand (requiring surgery) while working around the machinery in our scenario. If the indirect (uninsured) accident cost totals $160,000 and the direct (insured) cost is $40,000, the ratio of indirect to direct costs will be 4 to This ratio just happens to be the average ratio between indirect and direct accident costs in the USA.
Ratio Between Total Accident Costs to Direct Costs
This ratio is a little more dramatic than contrasting the indirect costs with direct costs. It helps emphasize the fact that direct costs are actually just the tip of the iceberg. To determine this ratio, use the following equation:
(Direct Costs + Indirect Costs) / Direct Costs = ___ to 1
Check Out: Experience Modification Rate Explained
In this case, if the indirect (uninsured) cost totals $160,000 and the direct (insured) cost is $40,000, the ratio of total costs to direct costs will be $200,000/$40,000 = 5:1. What will XYZ have to earn in sales to pay back this lost money? Well, if XYZ has a 5% profit margin, they’ll have to earn 20X the total accident cost, or $4 million in sales!!!
Return on the Investment (ROI)
To determine ROI, it’s necessary to estimate the amount of the initial investment required to complete corrective actions and safety system improvements. Once the initial investment is determined, use the equation below to determine ROI.
Total Accident Costs(Direct + Indirect) / Total Investment x 100 = _____$ ROI
Let’s say our investment to train all employees on lockout/tagout procedures, machine guarding and PPE while working around machinery will be $20,000. If our total accident cost is $200,000, our ROI will be 1000%!!! Now that’s a return.
Provide Options when Presenting Solutions
When presenting a solution to an accident, it is best to have all calculations completed, so you can present multiple solutions with an ROI for each. Your presented options should follow the below style:
- First option — If we had all the money we needed, what could we do? Eliminate the hazard with primarily engineering controls. Additional administrative controls if required.
- Second option — If we have limited funds, what would we do. Eliminate the hazard with primarily administrative controls. Engineering controls if required.
- Third option — If we don’t have any money, what can we do? Reduce exposure to the hazard with administrative controls and/or PPE.
The third option might not always be the cheapest option when it comes to ROI for safety, as it may keep the hazard in the workplace, which could result in more injuries.