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April 28, 2008

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Just ask- Reasonable practicability

Question: As part of our risk assessment process, and to do all that is “reasonably practicable”, we are aware that we should perform some sort of cost-benefit analysis. How should we do this?

Answer: Cost-benefit analysis techniques have been developed in recent years, as decisions concerning risk have been made on a cost-versus-risk basis, e.g. so far as is reasonably practicable (SFARP).

It should be remembered that when such defences are relied upon in court, s40 of the Health and Safety at Work, etc Act 1974 shifts the onus of proof onto the defendant. As a result, comprehensive information will be required to justify any decision made on cost grounds.

To undertake a cost-benefit analysis, the following questions need to be answered:

– What are the anticipated costs of loss if no risk-control measures are taken?

– What are the costs of reducing or eliminating the risk?

– What degree of capital expenditure is required?

– What is the expected lifetime of such an investment?

– What ongoing costs will be involved, e.g. regular maintenance, training?

– What will the benefits be (both qualitative and quantitative)?

– What is the pay-back or break-even period?

The benefit factors should initially be listed, and wherever possible quantified, so that the pay-back period can be established. Some benefits are easier to quantify than others but an attempt should be made to ‘guestimate’ the benefit, rather than to ignore it just because the quantification proves difficult. Benefits of effective risk control measures, which are used in the corporate perception of risk, and hence in the determination of risk acceptability, include:

– fewer claims, resulting in lower insurance premiums;

– less absenteeism and sickness;

– fewer accidents that cause injury and damage;

– better levels of health (both occupational and general);

– higher productivity/efficiency;

– better utilisation of plant and equipment because of less “down time”;

– higher levels of quality and product safety;

– better legislative compliance (safety/environment);

– higher employee morale and motivation;

– better cost control; and,

– better corporate image.

The costs are then balanced against the benefits (both qualitative and quantitative) and organisations may, as a consequence, make objective decisions regarding justifiable/acceptable and unjustifiable risks and the allocation of (scarce) resources, time, money and people, to a particular risk management project. This resource allocation will generally be based on the length of the pay-back period, coupled with a consideration of the law of diminishing returns. Most risk management projects tend to have pay-back periods of between two and five years, i.e. medium-term, as opposed to short-term.

DISCLAIMER
Every care is taken in the preparation of these questions and answers, which are supplied by Croner Consulting, a trading division of WoltersKluwer(UK) Ltd. Any advice or guidance contained herein is not to be taken as the official advice or guidance of IOSH or SHP/UBM. The information is correct at the time the answer was formulated and posted. However, the answers given can only address the general principles involved. Professional advice must be sought on any specific query or problem your business has relating to any issue or area raised.

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