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Construction and Contracting: Indirect and Direct Costs of Construction Accidents (Essay Sample)


Discussing the Indirect and Direct Costs of Construction Accidents


Construction and Contracting: Indirect and Direct Costs of Construction Accidents
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Indirect and Direct Costs of Construction Accidents
Accidents in construction sites always have some cost attached to it. Occupational Safety and Health Administration (OSHA) have rules that ensure employers compensate employees who are injured at the workplace. In the construction industry, accidents occur because of the high risk associated with construction sites. Some of the accidents may be due to employees’ negligence or pure misfortunate that could not be avoided by safety measures. Despite the nature of the accident, the employer must incur some cost in ensuring the employees gets medical attention and receives appropriate compensation. Construction sites insure workers against injuries, but in most cases an occurrence of an accident on the site will cost the project both direct and indirect costs. This paper examines the relation and implication between direct and direct cost of accidents in construction sites. Whereas project managers easily identify and quantify direct costs of accidents; it is not easy to establish indirect cost in totality. Some indirect costs have the greater impact to the project than the direct cost. Construction managers and accounts need to develop skills to factor in both indirect and direct cost in their financial reporting
OSHA (2007) identifies direct cost of accidents as those, which obvious to the management such as workers compensation claim, medical costs, indemnity payments and sometimes the legal fee to negotiate the compensation if there is a dispute. These direct costs are easy for the manager to include in the financial records of the project. Most construction managers concentrate on these costs at the expense of the indirect costs of an accident. OSHA (2007) points out the various possibilities of indirect costs such as costs of training replacement worker, cost of delay caused by the accident, cost of repairing damaged property, cost of lower morale, increased absenteeism, damaged customer relations and the cost of investigating the accident and implement corrective measures.
The indirect cost may vary depending on the type and magnitude of the accident. Manuele (2011) examines different researches that discuss the relation between direct cost and indirect cost of injuries. He identifies one of the oldest reach from Heinrich in 1926, which asserted that the cost of indirect cost was four times more than direct costs. The finding of the research that was published in 1931 is still in use by some constructors to date. Manuele (2011) cites a recent research by National Council on Compensation Insurance (NCCI), which indicates that the ratio of direct cost to indirect cost of accidents 0.8 to 1, which is quite different from what Heinrich found. The differences in the ratio could be attributed to the different definition of indirect costs of accidents. For example, the NCCI research defined indirect cost as the time spent because of the accident by other employees not directly involved in an accident.
The Stanford Report of 1982, which OSHA adopted in 2007 presents the ratio between direct and indirect accident cost in a flexible manner. The ratio ranges from as low as 1:1 to as high as 20:1. This depends on the type of accidents and the direct cost incurred. OSHA (2007) asserts that the higher the cost of direct cost, the lower the ratio, while if the cost is lower the ratio to indirect cost is high. This implies that as the cost of direct costs goes up, it balances out with the high cost of indirect cost and thus reduces the ratio. Indirect costs are, therefore, always higher than the direct cost. When the ratio gets s to 1:1, the direct costs are beyond $10,000(OSHA 2007). This may be the medical cost or damage caused by an accident in a construction site.
Project managers in charge of construction sites must be careful on how they estimate the cost of an accident. Brownlee (2010) says that, in most cases, insurance companies will only pay the direct cost associated with the accident. They will cover the medical expenses in case of injury and cover the loss of property due to an accident. These costs will likely find their way into the books of accounts. The indirect costs of an accident are hidden (Manuele, 2011). It will take the eyes of a keen construction manager to estimate the indirect cost of an accident. The challenge after identifying the indirect cost is on how to link them to the accident and quantify them with financial figures.
Construction managers have to establish a comprehensive way of quantifying the cost of an accident. Van de Voorde (1991) develops a simple way that considers the different possible costs from an accident. These costs include administrative costs, injured worker costs. Crew cost, replacement worker cost, impact cost and damaged property costs. Van de Voorde (1991) further argues that the construction administrator should be able to differentiate accidents that lead to medical cost and those that lead to loss of time only. In most cases, medical cost accidents also result in loss of time. Calculating the cost of an accident in terms of time lost requires the manager to estimate the amount of time the employees stopped working because of the accident. Most project managers ignore the loss of time cost when computing total cost of an accident.
Mine Safety and Health Program Technical Staff (2011) claims that a construction managers can use the accident consequence tree to evaluate the cost of an accident. The accident consequence tree has several branches representing different costs. These include lost hours, lost assets, short-term payments, lost revenue and others...
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