Tag Archives: contractors

COVID-19: Next Steps in Construction

Construction never stopped in some cities and states during the height of the COVID-19 outbreak — and some airport and public works projects, in fact, gained some efficiencies because of fewer travelers and passers-by on the periphery of job sites.

Where work continued, contractors adjusted on the fly to help reduce coronavirus health risks to their crews. Now, as more construction projects are permitted to resume, contractors can incorporate lessons learned so far and factor in new variables to help manage risks and rebuild momentum in a world transformed by COVID-19.

Contractors deal with unexpected challenges frequently, often weather-related. That experience will serve the industry well as it adjusts to new safety requirements along with complexities of returning to sites where work perhaps started but then was halted.

Costs may increase, and schedules may stretch to compensate for additional steps that must be taken each day before hammer meets nail. Simply doing what’s compulsory shouldn’t be the focus.

See also: How Risk Managers Must Adapt to COVID

Contractors should develop and refine a comprehensive COVID-19 exposure control plan, which may include:

  • Appointing a COVID-19 officer at every job site, even if it’s not mandatory.
  • Integrating COVID protocols into a virtual or online training program for workers.
  • Adjusting management procedures to avoid communication gaps, given that project managers and other personnel may continue to work remotely.

Two key issues: Temperature screening and face coverings

You will need a high level of detail in COVID-related operating procedures. Take temperature screening at job site gates:

  • How will you take temperatures so as to avoid breaching the six feet of social distance?
  • Will workers be trained to take temperatures using no-contact thermometers, or will a third-party medical service or portable testing centers be brought in?
  • What temperature threshold will send a worker away?
  • What documentation, if any, will be kept of workers’ test results, and how will confidentiality be preserved?
  • Do workers need to arrive earlier than in the past, and does that have ramifications for overtime?

There are lots of decisions — and that’s just for temperature screening.

The protocols for face coverings require similarly detailed decision making as well as awareness of state and local mandates. Are face coverings required at all times, or only when it’s not possible to keep six feet of social distance? Are cloth face coverings sufficient, or are respirators approved by the National Institute for Occupational Safety and Health (NIOSH) mandated in certain circumstances?

Note that these new protocols may lead to new risks, such as fogging of eye protection and creation of blind spots. Consider applying anti-fog solution to the lenses, or use helmets with face shields, if appropriate.

This planning may seem daunting, but establishing protocols and communications materials now will make it much less onerous to enforce going forward.

Review financial and supply chain status

Contractors who complete a post-shutdown risk register or hazard analysis should expand their focus beyond health issues. It’s wise to ensure financing, permits and insurance policies have not expired. Consider requalifying subcontractors to check financial status. If there are red flags, consider using joint checks to ensure that lower-tier subcontractors and suppliers receive payment. And is your own cash flow sufficient to make payroll, or have you made other arrangements?

Note that some supply chain and labor issues resulting from the shutdown have not yet been resolved. Make sure you have the materials and crew you need to keep the sequence of work on target.

New reasons to adopt emerging technology

In the hierarchy of technology adoption, many contractors are starting by converting to virtual training and orientation to enable social distancing. Make sure you adequately test your technology and distribute clear instructions to help your workers adjust to using it.

Next, consider the use of technology such as wearables that allow contact tracing, which could help ensure that workers are complying with social distancing guidelines. Wearables for construction are being modified so that, for example, a worker could receive an alert when less than six feet from another worker. Some systems also allow you to identify what workers may have come in contact with an infected worker, should someone later test positive.

There also are opportunities to increase your use of offsite and onsite prefabrication, in part to reduce the number of people on a site at one time and possibly to contribute to efficiency.

Finally, this may be a great time to experiment with emerging technology, such as using robots to do floor layout, which has the potential to improve accuracy as well as reduce the number of people on a job site at one time.

There are some silver linings

No one would have invited coronavirus into the world, but new protocols to reduce health hazards may produce additional benefits.

Limiting the use of elevators to materials and creating one-way pathways for personnel may not only assist in social distancing but also contribute to increased productivity.

See also: 4 Post-COVID-19 Trends for Insurers

These steps could become a best practice worth keeping, along with many other new procedures.

It’s too soon to gauge the net impact of the coronavirus pandemic. But in terms of the business outlook, potential positive developments could include:

  • Construction opportunities increasing in sectors such as healthcare, infrastructure, warehousing (which was already going strong) and manufacturing.
  • Growth in modular, off-site construction, in part because it can help reduce the number of people on a job site at one time.
  • More U.S. manufacturing of construction materials, in response to coronavirus-related supply chain delays associated with offshore providers.
  • Regional population shifts in response to the hardships endured during the pandemic. These may result in increased residential construction in areas of growth, followed by additional commercial and infrastructure development.

In the near term, some projects will be under pressure to accelerate to get back on schedule. But COVID-related mandates may force a slowing of the process, which could enhance overall site safety and quality of work.

Vigilance, as always, is key — and not just about coronavirus. We need to remain attentive to typical construction-related injuries and issues such as heat-related illnesses. Caring for people will help us take care of business now and during the months of recovery ahead.

Visit Zurich’s COVID-19 Resource Hub for more information.

How to Pick Your Insight Team

Amid the merry-go-round of new objectives, targets and budget allocation that keep many a leader of an insight team busy, there is a question of “Who?” Who will do the work? That is probably accompanied by “how many people will there be in my team?” and “do they have the skills and motivation they need?” At first, this can all feel rather daunting. But it will be helped by, first, being clear on your goals. If you know what matters most and why, you’re in a better place to make those ever tricky people decisions.

Staffing your team has more potential options than in years past, with more data, analytics and research agencies, consultancies and contractors. Determining which route to take requires some thought. In my conversations with leaders, it sounded like different businesses favored different resourcing models, but it was unclear which was most popular.

For that reason, we ran a survey among our readers about customer insight team resourcing models. Thanks to all of you who took part. The time has come to share those results.

First, we asked about how customer insight leaders currently resourced their four technical teams that make up holistic customer insight:

1

  • Customer Data: For this team, as you can see, most leaders (67%) replied that all members of the team were employed by their company. The only alternative resourcing approach captured was a mixture of employed and contractors — but still all part of an in-house team. Perhaps it’s the greater ease of recruiting these skills, or the sensitivity with regard to customer data, but this team doesn’t appear to be a focus for outsourcing at the moment.

2

  • Customer Analytics: For this team, there was a similar picture, with an even bigger majority of leaders (80%) stating that all the members of the team were employed by their company. Once again, the only other alternative captured was a mixture of employed and contractors as part of an in-house team. These results were perhaps more surprising, given the much-touted difficulty recruiting analysts or data scientists. Perhaps many businesses are still recruiting rounded analysts rather than the more limited pool of data science graduates. The result certainly flies in the face of advertising by many outsourcing analytics providers.

3

  • Customer Research: Here, we began to see a slightly different picture. Only 50% of leaders replied with the most popular resourcing model thus far, that all the members of the team were employed by their company. The other half were split between outsourcing their research provision entirely and a mixture of both approaches. Sadly, this doesn’t surprise me. I’ve found many a CMO or CEO who assumes that research is an ideal candidate for outsourcing and just asks the agency to “do more.” Sometimes, this is down to the internal team not demonstrating clearly enough the value they provide, so they are simply being perceived as “research buyers.”

4

  • Database Marketing: Last, but definitely not least, is this commercially focused insight team. This category showed the most variation in resourcing models. More leaders (40%) still chose the most popular option; all the members of the team were employed by their company. But all the options we have seen so far were also used — contractors, outsourcing and a mixture of all of them. Given the more visible dependency that most businesses have on this team to hit income targets, I was slightly surprised by this.

As always in business, past approaches are no guarantee of business strategy, funding priorities or resourcing model preferences going forward. So we added a couple of questions to capture personal preferences. Experience has taught me that the preferences of two key parties tend to influence the way customer insight teams are resourced. First is the CEO and any recruitment policies he mandates; second is the customer insight leader who is leading the recruitment.

See Also: Leveraging the Power of Data Insights

So, how did you vote for those two personal preferences in resourcing models, and does that give us any clues as to how customer insight teams may be resourced now?

5

  • CEO preference: This reflects that CEOs value customer insight and view it as a potential competitive advantage, so the majority prefer all the members of the team to be employed by their company. There were also votes for use of contractors within in-house teams, a mixture of both and “no preference” (it depends on the team). This appears to be a continued opportunity for customer insight leaders to build on in 2016, to demonstrate to their CEOs that they offer that competitive advantage and are a key internal skills within their business.

6

  • Your preference: So, we finally come to the resourcing model that customer insight leaders themselves favor. What has given them the best results, that they would prefer to have at their disposal to achieve 2016 targets? Well, based on votes, it would seem the answer is definitely in-house teams. 60% favor all the members of the team being employed by their company, with the other 40% voting for a mixture of employed and contractors making up this internal team. For what it’s worth, that was my own experience, too. Growing your own talent internally worked best.

I hope you found the results useful. Do they accord with your experience?

One final thought, if you are seeking to build a strategic insight capability within your business, one that will empower your company for years to come, are you thinking long-term? Rather than be at the mercy of whether the jobs market has the candidates you require or graduates have the skills and aptitudes you’re seeking, why not shape the latter? I know a couple of businesses that have seen real value through building strategic partnerships with local universities.

See Also: A Wedding’s Lessons on Customer Insight

If you are fortunate enough to have a local university with a good reputation for numerate graduates (from business school or maths/stats faculties), why not work with them? Are there opportunities for internships to try out potential future employees? Would it benefit the university for you to go in and speak to students, even teaching them some of the skills they will need within business? How much better would it be for you to know  that students are being trained in the skills you require?

A great example of building this kind of partnership was the Data Talent Scotland event. I’m proud to have delivered a workshop at this gathering of data science students, academics, industry experts and businesses, helping to forge the kind of partnerships customer insight leaders will need.

Please let me know if you have built a sustainable pipeline of talent to resource your insight team for years to come. What’s working for you?

Construction Risk Management in the Rollercoaster Recovery

Although the long-term forecast for the construction industry is robust, it is experiencing malaise as it recovers from the recession. Week after week, positive reports from the government are offset by negative industry news reports, only to be followed by yet another optimistic outlook. So goes the rollercoaster recovery.

The continuing uncertainty of the economic recovery makes strategic risk management more important than ever for contractors. Insurance and risk management — which are major expenses — can be a source of competitive advantage or disadvantage for construction firms.

Insurance is an important product, and its purchase should never be considered as a commodity. The value of having the right insurance coverage (by means of policy, endorsement or extension) and limits cannot be overstated. There are direct, indirect and opportunity costs, all of which can affect your bottom line. The intelligent buyer knows there is a difference between price and value.

Insurance is also an important service. The existing trends and emerging opportunities in the construction industry are driving specialized and customized insurance, surety and risk management solutions. The discipline of strategic risk management is one such development. It is recommended that your company partner with your insurance adviser to conduct a strategic risk analysis and to evaluate your company’sresilience and risk accountability culture.

It is important to embed a risk management mindset into strategic business planning processes. As a strategic discipline, risk management serves several important purposes, including decision making, risk and cost allocation and business-process improvement.

Contractors need to be mindful of two important concurrent developments:

1. Pressures in the construction insurance market
2. Changing nature, scope and complexity of risk in the construction industry

Pressures in the construction insurance market

The construction insurance market is experiencing pressure from various disruptive forces. Some of these occurred independent of the recession while others were made worse by the recession. In either case, these trends will continue to be disruptive:

• Growing severity of workers' compensation losses
• Escalating alternatives to traditional insurance including captives, owner- or contractor-controlled insurance programs (OCIPs/CCIPs) and subcontractor default insurance
• Increasing number of owner insolvencies and subcontractor defaults
• Increasing challenges on property and builders risk placements with coastal wind and other catastrophic loss exposures
• Rising threat of increasing general liability premiums
• Growing pressure on professional liability because of increasing frequency and severity of large design-related liability losses
• Increasing regulatory and administrative requirements for employee health benefits under the Affordable Care Act

Expanding risks in the construction industry

To further complicate matters, the level of risk in the construction industry continues to expand. A number of industry developments are continuing to change the risk profile at the individual company level and for the industry as a whole. The following representative eight industry trends illustrate the growing nature, scope and complexity of risk to be managed by contractors:

1. Expanding use of alternative construction delivery methods, including design/build and integrated project delivery
2. Growing number of accelerated fast-track projects
3. Changing project finance methods, including public/private partnerships
4. Expanding number of joint ventures to meet project capitalization and surety obligations
5. Reemerging skilled workforce shortage
6. Growing reliance on technology, and vulnerability to disruptions of business systems and networks
7. Expanding use of building information modeling (BIM) and online collaboration on construction design
8. Continuing migration of construction defect claims and litigation from residential to commercial construction

A word of caution: This list of risk trends and developments is not exhaustive. Other risk exposures and issues may be important for your company depending on your scope of work, industry sector and geographic region.

Conclusion

Risk is inherent to the construction industry. Risk management is the bedrock of the construction industry. There is opportunity in risk. Strategic risk management is not about saying no to opportunity. Rather, strategic risk management is focused on protecting your business from being blindsided by hidden risks and cascading costs.

Strategic risk management will help you remain calm and composed during the rollercoaster economic recovery. More importantly, strategic risk management helps contractors identify factors and make decisions that improve their competitiveness, growth, profitability and reputation.

Minority-Contracting Compliance — Three Risks

On Jan. 13, 2014, the Department of Justice announced that two former executives of Schuylkill Products had been sentenced to two years in federal prison and forced to pay $119 million in restitution because of their role in what the FBI called the largest fraud involving the Department of Transportation’s Disadvantaged Business Enterprise (DBE) Program. A third individual, the owner of Marikina Construction, the firm that was used as a “front” in the scheme, received a prison sentence of nearly three years.

The sentencing of these individuals is not the result of an isolated incident. In recent years, federal prosecutors and the DOT inspector general have significantly stepped up enforcement of DBE and have brought several cases resulting in civil penalties and jail time. Some involved well-known international construction firms and their executives.

Here are three reasons why every contractor dealing with a federal, state or local minority contracting program needs to have proper compliance policies and procedures in place:

1.         Jail Time and Civil Fines

Contractors that do not comply with the DBE program’s rules and regulations face the very real threat of jail time and civil fines. According to the DOT, DBE fraud now represents more than one-third of the DOT inspector general’s open cases. From Oct. 1, 2003, through Sept. 30, 2008, investigations of DBE fraud allegations resulted in 49 indictments, 43 convictions, nearly $42 million in recoveries and fines and 419 months of jail sentences. From 2009 to 2010, the number of open investigations related to DBE fraud increased by almost 70%. The number of investigations shows no signs of slowing, as the DOT is aggressively hiring additional investigative agents.

Under several legal doctrines, a defendant can be held liable when the evidence shows that the defendant intentionally avoided confirming certain facts and learning the truth.

2.         Whistleblower Lawsuits

Under the Federal False Claims Act, every disgruntled employee is a bounty hunter. The act authorizes private individuals to bring a civil claim in the name of the U.S. against anyone who fraudulently obtained money or property from the government. The person who brings the action is entitled to 30% of the amount recovered for the government.

Contractors can become the target of a False Claims Act case if they submit payment applications to the government that falsely certify that a certain percentage of work was performed by DBE firms. Like in the criminal context, a contractor can still be liable even if it lacks actual knowledge of the DBE fraud. Reckless disregard for the truth or deliberate ignorance are sufficient.

3.         Bid Rejections and Challenges

Strict minority set asides or quotas are almost always unconstitutional. Disadvantaged business contracting programs, like the DOT’s DBE, are not quotas (a fact that DOT underlines in its regulations). Rather, they are goals that contractors must use “good-faith efforts” to achieve. In fact, many contractors would be surprised to know that a state transportation agency cannot reject a bid because it fails to include a commitment to subcontract work that meets or exceeds the stated DBE goal. However, for a bid to be accepted, the contractor must be able to demonstrate “good faith efforts” to meet the stated DBE contracting goal. Because most state procurement codes require the award of a contract to the lowest responsible and responsive bidder, failing to document adequate good-faith efforts is grounds for a state transportation agency to reject a bid or for challenge to be filed by a disgruntled bidder.

The risks that contractors face with not complying with minority contracting programs, particularly the DOT DBE program, literally cannot be ignored. At best, contractors that fail to comply with the program face significant financial ramifications in the form of fines, expensive lawsuits and lost projects. At worst, executives and employees can wind up in jail.

Risk Performance Metrics

For the past several years, up to three of the top five concerns expressed by respondents to CFMA's Construction Industry Annual Financial Survey have been insurance-related. And, contractors continue to seek how to leverage their investment in safety and risk management.

The traditional view of safety has been as a line item expense calculated within administrative overhead or as a cost center. Construction Financial Managers use a variety of techniques to evaluate the cost effectiveness of recommended safety and risk reduction investments. These include: ROI, ROE, and/or ROC calculations; cost benefit analyses; and breakeven analyses.

However, some forward-thinking contractors have gone beyond seeing the direct link of profitability from safety and risk management to establishing safety as a profit center. A select few have captured even greater value by making safety part of their brand image.

Either way, a program that measures safety — and risk-related leading indicators, loss analysis rates, and indirect costs can provide contractors with a competitive advantage that goes far beyond lower insurance rates.

Leading Indicators

Some companies understand that the fixed cost of insurance, the premium, is the smallest piece of the insurance pie. They recognize that true savings more often result from decreasing the variable costs of their insurance program — the loss dollars from claims.

These companies have learned that proactive safety and risk management programs increase profitability — they reduce risk, prevent claims, and contain costs through aggressive claims management.

What is their secret? Through the ongoing measurement of risk indicators, these contractors establish goals for improvement and continuously monitor their company's performance. Some traditional measures include such frequency and severity incidence rates as:

  • Total OSHA recordable cases
  • Total lost workday cases
  • Total lost workdays
  • Number of fatalities1

Called lagging indicators, these measures are passive metrics of prior results without consideration of the activities that influence the results. Also called downstream measures or trailing indicators, lagging indicators provide feedback on data collected and analyzed “after-the-fact.” These metrics are diagnostic and sometimes prescriptive; they reveal past performance and highlight improvement opportunities.

In contrast, current and leading indicators provide different views of safety and risk performance. Designed to influence real-time outcomes, current indicators provide almost immediate feedback on present activities. Current indicators include a supervisor's same-day completion of an incident report or the number of job safety observations completed on a project each day vs. an established goal.

Leading indicators are proactive measures of focused activities to prevent incidents of a general or specific nature. Also called upstream measures, these metrics are “beforethe-fact”2 and can predict future performance.

For example, a high number of safety orientations should help decrease the frequency and severity of onsite accidents. (The first table below compares lagging, current, and leading indicators for safety performance. The second table lists examples of emerging leading indicators for productivity, quality control, and risk management.)

Lagging, Current & Leading Indicators
Lagging
(Past Results)
Current
(Present Snapshot)
Leading
(Prevention Activities)
  • Workers' Comp Experience Rating Modifier
  • OSHA recordable rate
  • Total lost workdays
  • Average cost per claim
  • Daily record of incidents
  • End-of-shift record of incidents
  • Daily job safety observations
  • The number of safety orientations conducted
  • The percentage of project pre-plans completed
  • The number of safety meetings held
Emerging Leading Indicators
Productivity
Measured by the Number of:
Quality
Measured by the Number of:
Risk Management
Measured by the Number of:
Field supervisors with laptops or hand-held technology Independent third-party expert reviews on prototypical designs or materials Pre-bid constructability, scope, and schedule reviews completed
Administrative staff trained on automated functions Architect and engineer approvals for changes to specified materials or design specifications Pre-qualified or pre-approved subcontractors on the eligible bidding list
Open trade/craft employee positions filled compared to percentage needed Quality assurance inspections completed Subcontracts signed before starting work
Days with no idle equipment Detected defects corrected Project sites properly planned and laid-out for logistics, traffic control, and work zones
Projects with proper sequencing of trades Project files with digital photos of conformance to specifications Project sites inspected for compliance to safety and risk controls
Projects completed on time Completed projects with no open punch list items Projects that had a post-mortem review of project risk performance

Loss Analysis

While many contractors know their basic loss picture, fewer understand the factors that cause or contribute to accidents and claims. To leverage safety and risk management, contractors need to identify where to invest time, staff, and other resources. An analysis of historical claims and loss experience provides an excellent starting point.

There are many methods of analyzing claim and loss data, but it's important to conduct both macro- and micro-level analyses, which provide the clearest perspective on what types of accidents are loss leaders, in addition to clues about necessary prevention activities. Trend, type, causal, and lost workday case analyses are four basic and reliable methods.

Trend Analysis
A trend analysis determines the number of claims and the total incurred losses (the dollars paid plus the dollars reserved to pay for the future cost development of the claims) for each line of insurance coverage over a period of time. This provides a quick “big picture” view of claim count and loss experience by policy year.

Type Analysis
A type analysis summarizes the frequency of claims and the resulting incurred claim costs by type of loss. This method uncovers the leading types of loss for your company. For example, you may learn that two or three leading types of loss account for greater than 70% of your loss dollars.

By highlighting the areas that have the greatest impact on risk management performance, this analysis helps focus prevention efforts.

Causal Analysis
A causal analysis determines the reasons for accidents and resulting claims by evaluating various causal factors for each leading type of claim. It indicates areas for possible incident prevention activities and safety management controls.

Ideally, you'll be able to determine the job classification with the greatest number of claims and highest claim costs. For example, you might learn that “falls” are your company's leading type of workers' comp claim, making up 20% of your total claim count and 65% of your total incurred losses.

By evaluating the causes of your company's losses, you may discover that 60% of the falls were the result of a fall from an elevated surface — with 40% resulting from slips, trips, and falls on the same level. You might also learn that 10% of the total falls from elevation claims occurred from a scaffold or ladder, but that the other 90% resulted from getting into or out of vehicles or heavy equipment.

The safety and risk management controls for each of these causes are different. Depending upon the findings in the causal analysis, additional drill-downs should provide even better clues.

The success of this analysis hinges on the depth of your company's accident reporting and investigation process, as well as the quality of the claim coding information. Some of the best factors to evaluate include:

  • Day of week
  • Time of day
  • Date of loss vs. the date of hire
  • Objects and materials involved in the loss

Lost Workday Case Analysis
Why focus on lost workday cases? After fatalities, lost workday cases are among the most serious type of workers' comp claims.

Greater than a third of all workplace injuries result in lost workdays. According to the National Safety Council, the average cost of lost workday cases across all industries in 2005 was $38,000, an increase from $28,000 in the year 2000.3

The average for the construction industry is not calculated separately. However, the construction industry figure should be significantly higher for three reasons:

  1. The median number of days for each lost workday case is higher for construction than across all industries. The Bureau of Labor Statistics (BLS) reports seven days as the median number of lost workdays per case for all private industries in 2005.

    In contrast, the median is eight days on average for specialty trade contractors, nine days for general building contractors, and 11 days for heavy and civil contractors.

  2. The construction industry has some of the highest average labor wage costs among major industry groups.
  3. Modified or restricted duty assignments in formal return-to-work programs appear to be increasing throughout the construction industry.

    Yet, pockets of resistance still exist among some employers, employees, labor groups, and medical practitioners — even though such resistance results in longer absences and higher costs per case.

A lost workday case analysis determines the number, type, and severity of lost workday cases by occupation and body part. The most important portion of this analysis is the comparison of minor and major lost time cases.

“Runaway claims” can be identified by comparing the average length of cases greater than nine days (the overall median for the construction industry) vs. the average for cases less than nine days.

The distribution of lost workday cases by duration metric helps underscore the need to evaluate policies, procedures, and administrative controls to improve accident prevention and claim management.

Here's how it works: The chart below summarizes one contractor's average duration of lost workday cases. The contractor's totals were benchmarked against the average Bureau of Labor Statistics totals for the construction industry. In this case, 54% of lost workday cases exceeded 31 days of lost time, slightly more than double the construction industry average.

Distribution of Lost Workday Cases by Duration

Further analysis revealed that the median number of lost workdays for each case was 37 days (four times higher than the figure for the construction industry). The average length of cases less than nine days was only three days each; however, the average for cases longer than nine days was 90 days.

This meant that, on average, this contractor incurred a “runaway” claim after the fourth day of lost time for every injured worker. In effect, excessive days of lost work time unnecessarily increased this contractor's total loss costs.

From the contractor's point of view, this analysis helped demonstrate the importance of injury prevention. Severity reduction of lost workdays was identified as the goal and the contractor decided to partner aggressively with the claim service team on:

  • prompt reporting and thorough investigation of all injuries;
  • coordinated identification of modified duty assignments; and
  • better nurse case management to help injured employees return to work sooner.

Indirect Cost Assessments

New, sophisticated tools are now available to help contractors measure, monitor, and align safety and risk goals with overall financial performance.

As already mentioned, risk performance metrics provide useful information about the following key performance indicators:

  • leading types of losses,
  • their causal factors, and
  • possible corrective actions.

The next factor plays to the Construction Financial Manager's expertise: demonstrating the financial impact of insurance claims.

Not only does this metric show the financial benefits of safety, but it also creates a compelling business case for proactive safety and risk management.

Direct vs. Indirect Costs
Like other areas of construction financial management, insurance claims have both direct and indirect costs. For our purposes, the insured loss costs are considered direct costs, and the uninsured loss costs are indirect costs.

The indirect costs are the “hidden” costs and share three key characteristics:

  1. They act as a multiplier upon direct (insured) costs that increases the total cost of insurance claims.
  2. They are often not captured or calculated and, therefore, are not consistently charged-back or recovered in job costing systems.
  3. The net effect of factors one and two is a drain on contractor profitability.

There are many different estimates used by safety and risk management professionals for calculating the impact of indirect costs. Safety industry sources indicate an average ratio of indirect to direct accident costs from 2:1 to 4:1.

One conservative method is available at the OSHA Web site, where a sliding scale multiplier is provided that depends on the total direct cost. Note that the indirect cost multiplier decreases as direct costs increase. To calculate your company's ratio using this method, go to www.osha.gov/Region7/fallprotection/safetypays.html.

Required Revenue Replacement
Achieving buy-in for safety and risk management programs from other construction executives and operational managers can be a challenge. However, the revenue replacement tool is a convincing way to show the additional sales needed to offset the cost of insurance claims.

This number varies based upon total cost of losses and the company's profit margin expressed as a percentage:

Annual Losses (in dollars) ÷ Company's Profit Margin

With this metric, it's simple to see the total additional sales required to offset the cost of claims. Once upper management appreciates how substantial claim costs can be, it's much easier to obtain buy-in for proactive safety and risk management practices.

Conclusion

The most important outcome of risk performance metrics is the focus on continuous risk improvement initiatives. Incident prevention and claim management initiatives can significantly improve a contractor's jobsite productivity, quality control, risk management, and safety programs.

The net effect of this investment is a potentially significant increase in profitability, not to mention a bidding advantage for contractors.

More Resources

  1. National Safety Council
  2. BLS Table R65: Number of nonfatal occupational injuries and illnesses involving days away from work by industry and number of days away from work, 2005
  3. BLS Table R66: Number and percent distribution of nonfatal occupational injuries and illnesses involving days away from work by occupation and number of days away from work, 2005
  4. Harvard Business Review: “Competing on Analytics” by Thomas H. Davenport (January 2006)

Endnotes

1 Petersen, Dan, “Setting Goals, Measuring Performance: Frequency Versus Severity,” Professional Safety, Vol. 50, No. 12. December 2005, pp. 43-48.

2 Janicak, Christopher A., Safety Metrics: Tools and Techniques for Measuring Safety Performance, Government Institutes/ABS Consulting, Rockville, 2003.

3 National Safety Council. (2006). Injury Facts®, 2006 Edition. Itasca, IL.