How Icebergs and Indirect Costs Relate

By Stephanie Ohrt
Posted: September 17, 2015

Workplace Safety: Indirect vs. Direct Costs

As a temporary staffing or professional employment agency, one of your largest expenditures is likely Workers’ Compensation insurance. To keep premiums as low as possible, major emphasis is put on loss control and safety programs to prevent incidents and control the cost of claims. However, many employers don’t realize just how much accidents really cost them.

Loss costs are essentially broken up into two categories – direct vs. indirect. When differentiating the two, think of an iceberg. Direct costs represent the part of the iceberg visible to the eye. Those are the obvious ones – medical costs, lost wages and higher insurance premiums. Icebergs, however, are deceiving as most of their weight and size are below the surface. In a similar way, indirect costs of a job site injury are not visible on the surface, but are still present and have the potential to cost just as much, or even more as the direct costs if they are not property identified and managed ahead of time.

Examples of indirect costs include:

  • Time lost from work by injured employee(s)
  • Loss of efficiency due to the break-up of a crew
  • Cost of training a new worker
  • Damage to vehicles, tools, equipment or other property and the time spent cleaning up, repairing or replacing that equipment
  • Loss of production stemming from worker distraction
  • Continued overhead costs (while work was disrupted)
  • Loss of skill/efficiency, slowing production
  • Accident investigation, paperwork and additional administrative time
  • Loss of employee morale
  • Implementing corrective actions and safer systems
  • OSHA fines and penalties

Indirect costs are not limited to workers’ compensation claims. Indirect costs are present in property, auto and liability claims as well. Examples of indirect costs associated with non-workers’ compensation claims include:

  • Cost of accident investigation, fire department reports, etc.
  • Time spent managing consumer reaction/public relations
  • Price reduction cost to compensate for delays
  • Loss of market share, customer goodwill and/or suppliers
  • Loss of a favorable lease

The more incidents that occur in a workplace, the higher the costs – both in increased insurance premiums and indirect costs. There are many avenues an organization can take when trying to control both direct and indirect costs of a claim.   

  1. Focus on workplace safety and accident prevention. Develop a thorough written plan that explains in detail all policies and procedures and review with employees on a regular basis.
  2. Have a return to work program. Make sure all employees are aware of the programs and exactly what is expected of them if they become injured while at work.  
  3. Enforce prompt injury reporting. Studies have shown that even a day or two lag time between an accident occurring and turning in the claim can lead to drastically increased costs.
  4. Keep accident investigation policies. It’s crucial that management follows these policies when investigating accidents and taking statements.
  5. Maintain open communication with the employee after an injury. Regularly ask about their well-being, keep them engaged and develop a timeline for returning work. 

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