Cost avoidance is defined by any action taken in the present that prevents incurring greater costs in the future. For example, routinely investing in machine safety to remain in compliance with safety regulations is a form of cost avoidance.
Unlike immediate cost savings, cost avoidance measures are not reflected in financial statements or annual budgets. They are nevertheless important to a company's profitability.
When cost avoidance is not exercised, companies can face several potentially catastrophic expenses.
- Lost time wages and lost customers due to production constraints
- Increased worker's compensation rates
- Medical bills
- OSHA fines
- Litigation and settlements
These costs can be unrecoverable and cannot be forecast due to the large number of unknown and unpredictable factors that can contribute to an incident.
Despite this, machine safety is often seen as an expense rather than an investment. It is not a product or solution a factory can use to generate sales, so it does not positively impact the bottom line. It is, instead, a way to protect your assets (including your employees) from future adverse consequences.
(Learn about 6 Things to Look for When Selecting Machine Guards)
In this article, I will break down each of these five expenses that can be incurred when cost avoidance is not executed for machine safety.
Lost Time Wages and Lost Customers
Lost time wages and lost customers go hand in hand.
When an accident occurs, the company is responsible for maintaining the employee’s wages in order to minimize the impact of the incident on their life. This means the company will maintain payroll without the positive result of meeting the customer's need.
To avoid losing a customer, then, other trained workers need to do overtime to compensate for the decline in production rates. This also requires additional administrative time to manage shifting responsibilities, priorities, and training.
Worker's Compensation Rates
Worker's compensation is a type of business insurance that provides coverage for medical expenses, lost wages, and rehabilitation costs for employees who have suffered from a work-related injury or illness. This type of insurance is compliance-driven, but also protects employers from lawsuits.
Some insurance companies encourage machine safety by offering lower rates to companies that implement it. Be sure to research this option to help reduce this recurring expense, as well as avoiding increased premiums due to filed claims.
Medical bills are a variable that is not always fully considered by the insurance companies. There is potential for post-accident in-network vs out-of-network costs, increased deductibles, emergency transport, and service fees - all depending on where the accident took place.
The company is typically task/ed with the direction of the medical care but challenged with not creating additional inconvenience and decreased comfort for the affected employee.
OSHA standards are meant to ensure a safe environment for workers. Too often, however, these rules are ignored until there is a need to react to a negative event. This is usually met with fines ranging from thousands to millions of dollars, depending on the severity of the violation.
Litigation and Settlements
Litigation and settlements are the most expensive and the ugliest portion of the cost avoidance formula.
Companies want to take care of their employees, but when an accident occurs they often shift to a defensive position. This requires support of an internal legal team or an external law firm focused on job-related accidents. Consultations, payroll for fact finding, and negotiations are all time-sensitive costs that add up quickly. Court costs and associated expenditures may be incurred if negotiations are unsuccessful.
Ultimately a settlement of some sort will be paid out for pain and suffering for the employee and their family. This is an undesirable outcome that negatively affects the company's bottom line.
Machine Safety Cost Avoidance
Cost avoidance is important to secure the profitability of any facility. The benefits of investing in machine safety more than outweigh the initial costs.
To ensure the costs are calculated properly for funds appropriation, be sure to work with a qualified turnkey safety guarding company. These companies can provide education, recommendations for required safety upgrades, and full designs and quotes. They can also help you create and implement your machine safety plan.
It is a small cost for a rich future.