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How safety first improves your bottom line

By Jordan Mann

In the 1990s and 2000s, there was a phrase that summed up most contractors' business philosophy: "Production, Production, Production." This philosophy, and for some it was a business motto, was to push through and get the job done, no matter the cost. You couldn't slow down because, "we don't get paid until the job is complete." But that cost often came in the form of workplace injuries, resulting from an overall disregard for job safety.

If anything good came out of the economic dumpster fire that was 2008, it was around that time that the mindset started shifting as budgets tightened and many contractors suddenly realized they had an experience modification number on their workers' comp policies. They also realized that when they were faced with The Incredible Shrinking Profit Margin, those experience modification numbers became downright painful. This caused a tectonic shift in the way employers did business, because now it was all about economic survival. Those who made their living in the construction industry would have to put more focus on job safety.

As the economy slowly crawled out of the shadows and work started to pick up, many employers came to the realization that "those who forget history are doomed to repeat it," and smartly continued to focus on safety. And in doing so they began to realize something they had generally ignored before the second millennium: that job safety can actually help them make money. Companies that tighten their rules and requirements for safety will get the work. And those that don't will be left out in the cold.

The way a company turns job safety into profits starts with the workers' comp experience mod. Although several states have looked down on the practice of using experience mods as criteria in the bidding process (as a trailing indicator from a company's previous three years, it's not relevant in actually determining that company's current safety standards), it still happens, and many employers with experience mods over 1.00, or as high as 1.25 in some states, find it harder to win bids, and in some cases, can't win them at all.

However, contractors with higher mods can still get work from general contractors, particularly those that don't care as much about experience modification factors. But if that contractor has a 1.3 experience mod and is bidding a project against a competitor roughly the same size but with a much more attractive 0.7 mod, the bids they give are either going to be completely different, or the profit for each company will be different. Let's say the 1.3 contractor has a premium of $300,000, and the 0.7 contractor has a premium of $160,000. The 1.3 contractor has to make the money for that extra premium somewhere, so he's either going to have to bid higher than his competitor (with a greater chance of losing), or he can bid about the same, but by doing so has to reduce his profit margin to 8 percent on the bid, while his competitor can have a 15 percent profit margin with the same bid cost.

The profitability lost to these companies is significant on more than one level. First, their revenue is considerably less than what it could be because their experience mod is high and their workers' comp expenses are elevated. For example, a company with an experience mod of 1.3 does about $10 million in revenue with $300,000 in workers' comp premium. In a couple of years, as workplace injuries decrease, their experience mod drops to 0.70 and their workers' comp expense to about $160,000 - almost half of what it was before. But here's the icing on the cake: their revenue increases to over $20 million because with a lower experience mod they are winning more bids.

Companies that still focus on production before safety are leaving themselves vulnerable to a nasty sting when they least expect it. I recently worked with a client that had an experience mod over 1.60 because their "Production, Production, Production" mantra compelled them to put an employee who was blind in his left eye in the driver's seat of a company vehicle when they were short on drivers and a job had to be completed at all costs. Needless to say, on a narrow country road he couldn't notice just how close the left side of the truck was to the on-coming vehicle and slammed into it, rolling off the road.

All three employees were injured, with claims stretching out over a five-year period that reached nearly $1 million dollars. In addition, the three-year spike in the experience mod likely cost them $200,000 in extra workers' comp premiums, money that could have been added to their profit margin.

This was a wake-up call for the company, leading them to become more diligent on what really is important and making them focus on more than the bottom line when it comes to their employees. As a result, their experience mod has dropped back below 1.00, their premium expense is shrinking and, best of all, their revenue has increased from $7 million to over $10 million in just 18 months, while becoming a more attractive choice to many general contractors in the job bidding wars.

The message is crystal clear; don't let a lack of job safety negatively impact your experience mod. If you do, the consequences will be a direct hit on your businesses profit margins, which for many business owners also means a direct hit on their personal life. Pay attention to the things that keep your experience mod low - both workplace safety and proper claims management - and let the money keep rolling in.

Jordan Mann is a Certified WorkComp Advisor at Coverage, Inc. in Chantilly, Va., and co-creator of SmartComp Mid Atlantic.