THE COSTS OF ACCIDENTS AT WORK

INTRODUCTION

Managers in industry know that accidents cost money. Whether people injured, plant and machinery damaged or product wasted, organizations lose money.

Large scale losses; arising from major fires or explosions, or involving loss of life, are very visible.

E.g. Piper Alpha explosion involved the loss of 167 lives and is estimated to have cost over £2 billion, including £746 million in direct insurance payouts.

BP estimate that the refinery fire at Grangemouth in 1987, in which 1 person died, cost £50 million in property damage and a further £50 million due to business interruption.

Compensation given to people injured at work often involves large sums of money: for example a car worker who suffered repetitive strain injury was recently awarded around £60 000.

Twenty years ago, the Confederation of British Industry (CBI) said, “At the company level, if a readily applied and simple formula could be devised by which the financial loss caused by accidents and diseases could be measured…., it would make a valuable contribution towards reducing industrial accidents and occupational ill health”.

Since then, although there have been attempts to estimate the costs of accidents, usually concentrating on those involving personal injuries, there remains no generally accept figure or methodology.

However, in 1989, HSE’s Accident Prevention Advisory Unit (APAU) began a series of five case studies with organizations from various sectors of industry.

The aim was to develop a methodology to accurately identify the full cost of accidents, to publish the methodology and results and thereby provide an incentive for all organizations to take the management of health and safety more seriously.

In loss control theory, the relationship between accidents is often expressed as accident triangles.

These triangles are used to show the relationships between the number of accidents involving fatal injuries, non-fatal injuries, property damage and near-misses, forming the peak, middle and base of the triangles respectively.

The severity of the outcome of an accident often depends on chance if organizations fail to properly identify hazards and control risk.

For example, if a person slips on a patch of oil leaked from a machine, the consequences may range from soiled clothing to fatal injury. Coincidently, the leaking oil may be a contributory factor to machinery breakdown or lead to fire causing major or minor damage. Therefore, as the precise outcome of an accident cannot be predicted, the only effective way to reduce accidents is to control the underlying causes. Controlling the causes of the patch of oil therefore has the potential to prevent a whole range of possible consequences.

Managers now increasingly use the principles of loss control to minimize accidental losses.

The costing’s methodology developed by APAU attempted to identify the cost of all accidental losses that were considered to be preventable and that an organization committed to loss control would aim to eliminate.

To achieve this objective the methodology was based on a wide definition of the term `accident’. An accident was regarded as any unplanned event that resulted in injury or ill health of people, or damage or loss to property, plant, materials or the environment or a loss of business opportunity.

Injuries/damage: Minor injuries/miscellaneous damage no business impact: e.g.

cut, strain or damage to equipment Moderate injuries/damage with some business impact: e.g.

fracture/burn/smoke emission/moderate damage. Severe injuries/damage/business impact: e.g. loss of sight,

major fracture, minor fire. Fatality, explosion with moderate damage, significant adverse

business impact. Multiple fatality, or explosion with major loss/ catastrophic

business and/or environmental impact.

From several accident case studies; accidents cost:

One organization as much as 37% of its annualised profits

Another the equivalent of 8.5% of tender price

A third organization 5% of its running costs.

Comparisons were also made of the ratio of insured costs to uninsured costs. This is represented as an iceberg showing the full costs of accidents, including those hidden below the water line. This is shown in Fig. below.

Fig: Insured and uninsured costs

UNINSURED

INSURED

DIRECT INDIRECT

e.g. employer’s liability and public liability claims, damage to buildings, damage to vehicles

e.g. sick pay, repairs, Product lost/damaged

e.g. business interruption, product liability

e.g. investigation costs, loss of goodwill, loss of corporate image, hiring and Training of replacement staff

Case Study 1 – Construction Site

A study carried out on the construction site for a supermarket. Duration of a study: 18 weeks.

The main contractor was a wholly owned subsidiary of an international building and civil engineering company.

Work on the contract, valued at about £8m, completed in 13 months.

Labour was provided primarily through 29 sub-contractors. A project manager was assigned to the site, along with two assistant site managers. Engineers were employed from an agency.

All accidents which met the accident definition, were above a threshold value of £5, and were considered by the main contractor to be preventable, were recorded for the whole site.

A total of 3626 were recorded which met this definition and resulted in direct financial losses of £87 507. Opportunity costs, mainly wages paid during periods of no production, amounted to a further £157 568, making a total loss of £245 075.

Assuming that accidents occurred at this rate throughout the entire contract, total losses were about £700 000 (8.5% of the £8m tender price).

56 minor injuries and 3570 property damage accidents were recorded. It is to the company’s credit that no major injuries, dangerous occurrences or over-3-day injury accidents occurred.

National construction accident data indicated that one over-3-day injury accident could have been expected.

An accident triangle is given in fig. 1.

Fig. 1: Accident triangle

3570 Non-injury accidents

56 Minor injuries (first aid only)

(1) Over-3-day Injury accident

The accident triangle shows the largest ratio of non-injury accidents relative to injury accidents. The construction industry generally has one of the highest reported injury incidence rates of all industrial sectors in the UK.

If this study is representative of the industry it suggests that there is considerable scope for potential cost savings, by reducing accidental loss from accidents not involving personal injury, which make up the base of the triangle.

The ratio of insured costs to uninsured costs incurred by the main contractor was 1:11. See Fig 2.

Fig 2: Accident iceberg – the hidden cost of accidents

Case Study 2 - Creamery

A second study (13 week) took place at one of a number of creameries owned by a leading UK manufacturer of dairy products.

The manufacturer was, in turn, owned by a larger multi-national company.

About 340 people worked at the creamery, organised into product and service departments.

Each department has its own supervisors and manager, under the direction of a general manager. There was a range of continuous and batch processes on site and night shifts operated in some departments.

The creamery received up to 300 000 gallons of milk a day, collected from over 400 dairy farms, for processing into a range of dairy products.

Other work activities included producing colourings, flavourings and packaging for products.

Products were sold primarily to large supermarket chains, which imposed strict contractual requirements relating particularly to food quality and hygiene and the timeliness of deliveries.

Most of the products had short shelf-lives so there was a continual need to keep machinery and equipment in good working order to maintain production.

A `no-blame’ policy was adopted for the duration to encourage staff to report all accidents.

A total of 926 accidents were recorded, resulting in financial losses of £184 253. This was equivalent to 1.05% of operating costs during the study period.

The total costs of all accidents recorded was £243 834). Accidents which cost less than £5 or 15 minutes lost time were not recorded.

Of the 926 accidents, six resulted in over-3 day injuries and a further 31 injuries required first-aid treatment.

For each serious injury, there were five minor injuries and 148 accidents involving damage to property and other non-injury losses.

Ratios between these types of accident are represented in the accident triangle in fig. 3.

Fig. 3: Accident Ratio Triangle

1 Over-3-day Injury accident

5 Minor injuries (first aid only)

148 Non-injury accidents

Fig. 4: Accident iceberg – the hidden cost of accidents

The ratio of insured costs was 1:36 (fig.4). The difference between this ratio and that recorded in the other studies is partly accounted for by variations in insurance carried by different organizations.

The important point is that each study the figure for uninsured costs far outweighed insured costs.

A large number of accidents happened around the start of a shift at 6:00 am. However, the electricians and mechanics needed to carry out repairs were unavailable until 8:00 am because of the nature of the company’s shift system.

Following presentation of the study results to the company, this problem was largely resolved, by providing key machine operators with further training so that they could carry out some of the routine preventative maintenance tasks themselves.

This subsequently considerably reduced the number of accidents and lost time experienced by the company following the study.

This lessons could be applied to other chemical companies, as the processes undertaken were similar although the nature of the materials handled will be different.

Case Study 3 – Transport Company

A study took place at a transport company for 16 weeks. The company employed 80 people and was part of the same organization which owned the creamery, although it was separately managed.

The company operated a fleet of milk tankers on behalf of the Milk Marketing Board and collected milk from farms and delivered it to the creamery for processing.

The company then delivered produce from the creamery to the regional distribution centres of major supermarkets throughout the UK.

About 65 vehicles were based at the site and there was a maintenance department responsible for servicing both these and a further 80 refrigerated vehicles based elsewhere.

A total of 296 accidents were recorded. Financial losses resulting from these accidents, at £16 215, represented 37% of annualised profits. Total accident costs represented 1.8% of operating costs.

During the study, none of the accidents resulted in personal injury, hence accident triangle could not be prepared.

Uninsured losses were 8 times higher than the insurance premiums paid during the period of the study.

Fig. 5: Accident iceberg – the hidden cost of accidents

Case Study 4 – North Sea Oil Production Platform

A fourth study took place at an oil production platform operated by an international oil company.

The company was engaged in world-wide exploration, production and marketing of crude oil and natural gas.

It manufactured and marketed finished products refined from crude oil. It also traded in and transported, by tanker and pipeline, crude oil, liquefied natural gas, refined products and other commodities.

The platform was situated in an approximately 400 ft of water and was located 100 miles from land. It was staffed by between 100 and 120 people including a number of sub-contractors.

The plant and equipment operated continuously. Staff worked 12-hour shifts and were divided into two teams which alternated between the platform and shore leave.

The study took place for 13 weeks. The minimum recordable loss was set at half a barrel of oil or one hour of lost time.

During the study, 299 accidents were recorded, 2 of which involved absence from work for more than 3 days. A further 8 needed first-aid treatment.

37 of the accidents, costing £24 822, were judged to be unpreventable. Excluding these 37, the 262 remaining produce an accident ratio of 1:4:126 for the platform, with total accident costs of £940 921.

Fig. 6: Accident ratio triangle

1 Over-3-day Injury accident

4 Minor injuries (e.g. first aid only)

126 Non-injury accidents

Fig. 7: Accident iceberg – the hidden cost of accidents

Case Study 5 – NHS Hospital

The fifth case study was carried out in a hospital which employed 700 people.

The hospital had 367 beds, 7 care of the elderly wards, a plastic and oral surgery unit, and an annual budget of £8 m.

The study took place over 13 weeks. During this time, a total of 1232 accidents were recorded.

This resulted in a total lost of £100 000. On an annual basis, this equated to around £397 000 or 5% of the hospital’s annual running costs.

Fig. 8: Accident Ratio Triangle

1 Over-3-day Injury accidents

10 Minor injuries (e.g. first aid only)

195 Non-injury accidents

The Costing Model

Fig.9: Economics of management control

Costing Model

The `costs of the control programme’ may include: • decision making • safety hardware, e.g. ventilation systems,

guards; • communication and training time • publicity campaigns • on-going inspection and auditing effort • maintenance • programme coordinator and support staff costs

The `costs of programme failures’, for example, include:

• major and minor personal injury accidents

• occupational ill health • equipment and material damage events • product losses • process and technical breakdowns or

damage to the environment.

These programme failure losses arise primarily from failures of management control, and if not prevented or contained can interact and escalate into larger losses.

There are also intangible costs due to programme

failures, for example loss of business image, customer satisfaction, employee morale, goodwill and reduced productivity. These intangibles could not be quantified in financial terms.

The outcome of any particular accident is often a matter of chance: factors combine and take effect so that a near miss, minor injury or serious injury may all result from similar sets of circumstances.

If the circumstances that lead to minor accidents can be controlled, those same controls will also prevent accidents with more serious consequences, resulting from the same management failings.

Estimating the Costs of Accidents: A Methodology

(1) ACCIDENT

Define the term `accident’ – refers to any unplanned event that results in injury or ill health of people, or damage or loss to property, plant, materials or the environment, or a loss of business opportunity.

(2) INTRODUCTION

• Suitable for organizations employing up to 700 people in varying industries.

• It was designed to provide a high level of accuracy about the costs of accidents.

• Smaller organizations or those with less complex managerial structures and processes may be able to modify it to suit their own needs.

• Application of the methodology is resource intensive and time consuming.

• Application of the methodology to a sample of work activities or for shorter periods of time may be appropriate.

• It can be used to cost accidental loss at representative sites within an organization; the results can then be extrapolated to give an estimate of the total costs to the organization as a whole. Comparisons can be made between insured and uninsured costs.

• Results from the costing surveys can be used to identify particular types of loss, and where and when they occur. This information can be used to target improved management control.

(3) METHODOLOGY

• Accounts for financial costs and opportunity costs arising from accidents separately.

• `Financial costs’ – additional costs incurred to achieve desired output, e.g. overtime payments following a machine breakdown, cost of repair, etc.

• `Opportunity costs’ – costs of labour paid for no production, e.g. people waiting to work at an idle machine or at home unable to work through sickness or injury. There may also be energy costs of machinery running idle and the heating of buildings.

(4) SITE SELECTION

The site chosen should embrace a range of activities. It should be large enough for a significant number of event to be expected within an acceptable sample period.

Importantly, a site should be selected where the commitment of all working there can be secured and where systems can cope with the data collected.

(5) RESOURCE IMPLICATIONS AND PREPARATION

(1) Working Group A small working group should plan the study in

detail and manage it at site level. It is useful to undertake a short pilot exercise, e.g.

one week, to test and refine the data collection system, ensure that it works and that everybody understands it.

A coordinator is likely to be needed throughout the data collection stage. The working group will need to be fully familiar with the site’s management structure, accounting systems, and other working arrangements.

The aims and objectives of the proposed study should be carefully outlined to the site management team.

Information about the total loss control theory and the links between safety, quality and productivity should be provided.

In the study period, the site should operate a `no blame’ policy to encourage al accidents to be recorded. The commitment of staff at all levels is essential.

(2) Liaison with Employees

Meetings of employees’ representatives, such as the site health and safety committee, should be briefed about the remit of the study, and questions answered.

Employees may need reassurance on the issues of a no-blame policy and any `hidden agendas’, for example how data about individuals will be used.

The design of the data recording forms will need to be assessed and agreed by management, employees’ representatives, and any contractors involved.

Briefings are required to ensure that all employees have the opportunity to discuss the study.

It is vital to secure the commitment of the majority of people working at the site before recording begins.

(3) Forms Completion Generally front line supervisors should be responsible

for the completion of forms provided. All forms should be collected at the site by the

coordinator and individually checked and logged. Cases on uncertainty, e.g. about whether the

accident was preventable, should be referred to the working committee for adjudication.

Calculating wage costs may be very complicated if a wide range of rates and bonuses are paid. Hence, average values of normal and overtime rates can be used for each department or section.

(4) Losses to Be Included The aim should be to include the costs of all accidents within an agreed definition. This will include in all cases:

injury, lost time, first aid, property damage.

unplanned absence, loss/theft of items, product damaged/out of specification, departure from planned, production which gives rise to a loss.

(5) Data Collection System

Form 1: Departmental accident form

This form is used in the department where the accident happened, to record the cost of all losses occurring within the department arising from an accident.

Form 2: Secondary stage form

This form is used to record the costs to a department of accidents that occurred in other departments. These costs are linked back to the originating department.

Form 3: Continuing costs form This form should be completed on a weekly

basis by each department. It shows the continuing losses from previous accidents, including both long term absentees and any costs in replacing them.

Form 4: Management report A weekly report by management on the time

they and their administrative staff spent dealing with accidents.

(6) Accident Potential Matrix Recording accident statistics alone fails to identify or

record their significance in terms of potential for escalation.

Organizations experiencing relatively small numbers of accidents where there is high hazard potential may wish to use an accident potential matrix to provide a broader, more meaningful indication of the consequences of substandard health and safety performance.

Use of the matrix will assist management in identifying those accidents with potentially serious cost or other consequences so that managerial effort can be targeted accordingly.

E.g. the accident potential matrix in Figure 10 – used within the oil industry by Shell (UK) Ltd. Such matrices can be used to record the worst credible, as well as the actual, outcome of each accident. For the purposes of the costing studies, however, the calculation of losses should be based on actual, not potential loss.

Fig. 10: Accident potential matrix

Two parameters are established:

- the type and severity of the accident, in terms of severity of injury, damage to plant and equipment or impact on business;

- the extent of exposure in terms of numbers of persons affected/at risk (injured, unwell or exposed to chemical/agent or at risk of these for the worst credible case).

The matrix above: The type and severity of the accident is represented

by the vertical axis. A scale of severity is shown for each type of loss, i.e. injury, damage, impact on business.

The scale comprises 5 categories of severity (1-5) from minor at the top to major at the bottom.

There are 5 categories representing the number of persons affected or at risk. These range from “0” to “100”. Each category is assigned a letter from A to E.

The minimum size population is shown as zero; where no persons are affected or are likely to be affected.

Codes A1, B2, C5, etc. is used to classify both the accident’s actual outcome and its worst credible outcome.

The shaded part is the area considered to have a high potential for loss.

(7) Data Analysis and Output Forms completed on site need coding and costing centrally prior to being input to computer software.

For safeguard- register the study under the Data Protection Act 1984.

The precise method adopted for analysis will depend upon the sample size, computer software available and staff expertise (e.g. SPSS – Statistical Package for the Social Sciences; spreadsheet program).

REPORTING FORMS

Form 1: Departmental Accident Form

1. Details of accident

2. Personal injury or absence

3. Breakdowns / damage/ loss or theft of property / vehicles/ equipment

4. Rescheduled production

5. Product lost, wasted, or not to specification

6. Other costs

Form 2: Secondary Stage Accident Form -to be completed in the Department where the

accident happened, and passed to the other department immediately.

1. Details of loss event 2. Details of extra costs incurred ; Costs of contracted

out work 3. Labour costs of in-house remedial work 4. Plant/equipment costs of remedial work 5. Materials / spares/ consumables etc. used 6. Enhancements (e.g. was other routine work done

whilst the repair was being carried out) 7. Other costs

Form 3: Weekly Report by Production Supervisors

1. Labour costs of continuing remedial work 2. Long term injury / sickness absence a. Time lost by persons absent during this week b. Details of replacement labour (e.g. replacing

injured persons) c. Other costs associated with long term injury /

sickness absence 3. Product loss 4. Other costs

Form 4: Weekly Report on Management / Staff Time

1. Time spent this week a. Dealing with personal injury incidents b. Processing insurance claims c. Dealing with process breakdowns d. Dealing with damage to plant, equipment or

product e. Liaison with Central services personnel on

accidents 2. Other costs