Case Study:
How Safe vs. Cost
Mario Gentile
February 22, 2016
Professor Savage
Business and Society
How Safe vs. Cost
Donnelly Industries, Inc. began as a small painting contractor in 1977, and over the years has evolved into to a general contractor, construction manager, and property developer. As Donnelly Construction grows, so too do the safety issues. Donnelly serves a wide variety of commercial sectors including: retail, auto dealerships, medical offices, corporate offices, country clubs, schools, and the hospitality industry. Safety is the one area that Donnelly has focused on over the years, but it is a continuous struggle and cost to keep the injuries down to the industry standards. This paper will focus on the dilemma of “How Safe vs. Cost,” should a company go to achieve safety as a priority, while also keeping employees motivated and driving them to change the company culture to safety.
Donnelly Construction employs about one hundred employees. The chain of rank starts at the top with the President and CEO of the Donnelly Construction, Rod Donnelly. Next is Donnelly’s Vice President, Christopher Powers who second in the chain of command and sales. The next chain of command in Donnelly goes to the Project Managers of the company. Then Donnelly has the field employees. The top tier leaders of the field employees are the Superintendents. The Superintendents are the leaders out in the field that the upper Donnelly management relies on to get the job done safely and without injuries.
Donnelly’s environment has evolved over the years, but the bottom line has stayed the same. That bottom line is safety. But at what cost? The strain of new challenges due to the economy, has made it hard for Donnelly Construction to stay competitive in the market. Donnelly has had to bid projects so low, just to get the job, that there is very little room for overhead and profits. On top of the competitive market for construction, the liability of employees getting hurt on a construction site is very high, due to the nature of the business. At this point in 2012 Donnelly was not the worst construction company in safety, but certainly not the best, in accordance to our EMR rating or experience modification rate. This rate is the workers compensation term that refers to the experience modification rating adjustment of a contractor’s workers compensation policy. The higher the rate, the higher the insurance. At this point, Donnelly’s MOD rate was around 1.0. 1.0 is about average, but companies who are on top of their safety and have fewer claim are typically under .700. Getting to this point, takes time, discipline and money to get under .700. The dilemma continues to be, how to get the MOD rating under .700, while at the same time being competitive in pricing, retaining sales and being ethical. Safety comes with a cost, and most companies lack the resources to have continuous safety monitoring and training. Donnelly had no choice in the situation, but to invest in safety, because of the insurance rates. Donnelly could not keep on track with the high insurance premiums and also be profitable, so the choice had to be made to invest in safety.
Donnelly figured out that most of their competitors were bidding so tightly on the work, that it was very hard for a company of Donnelly’s size to stay competitive. Donnelly was bidding the work at cost just to get the job and keep the employees working even if the company was not making a profit on the job. Donnelly figured out that the only way to reduce overhead costs was to get the MOD rate down, and the only way to do that was through safety. Donnelly figured out that if they can get the insurance rate for the company down only a couple of percent points, that they would save the company hundreds of thousands of dollars in insurance, thus securing the company’s health and prosperity. On an average from the past four years, Donnelly’s insurance rate ranges from $600,000 to $800,000 per year. This rate is very high and with little to no margins, Donnelly had to find a way to stay competitive. Donnelly decided to hire a third party safety consultant to come in and show them how to run a safe and productive job site. The safety consultant not only had thirty years’ experience in construction safety implementation, but he had the credentials to back up his argument that a safer company ultimately runs more effective and productive, but also can save money without using their overhead. The safety consultant came from the outside looking in and educated the company on how being the safest company in the industry will not only bring success and reputation, but will keep the company healthy and competitive for years to come. This is where the challenge came into hand on the company changing their vision and goals for the security of the company.