What is the difference between Direct and Indirect cost? | Examples |
To determine the difference between direct and indirect cost we need to understand each one-by-one first. So let's get into it.
What is Direct Cost?
Direct Costs are the costs that a company directly have to pay as a result of accident. Direct costs are directly related to accident and can be estimated easily. These costs can be insured and uninsured.
For example:
It's like if someone got injured while working in an unsafe working environment, the company has to pay for:
- - Their medical bills
- - The wages they miss while they're recovering
- - Fixing or replacing broken equipment
- - Hiring and training a new person to replace them
- - Legal fees and fines
Direct costs may include:
- Medical expenses (e.g., hospital bills, doctor visits)
- Lost wages and benefits
- Workers' compensation claims
- Property damage or equipment replacement
- Overtime pay for replacement workers
- Training costs for new employees
- Legal fees
- Regulatory fines and penalties
- Insurance premium increases
- Damage to products or equipment
Medical expenses:
When a person got injured as a result of accident, company is responsible of paying all of his medical expenses. This medical expense's may include ambulance ride, treatment, doctor visits, hospital stay and medication (Surgery) etc.
Sick pay:
When a worker do not work due to injury, the company has to pay him without work until he recovers. This is because its a legal requirement and also a moral behaviour to support him while he is disable.
Worker's compensation claims:
Compensation claims are the legal and moral right of employees who get injured during work. Its like insurance that the company pay to injured worker for his financial support.
When an employee files a workers' compensation claim against the company, then the company pays for their medical expenses, lost wages, and other related costs. This means the employee receives financial support while they recover.
Property damage or equipment replacement:
If equipment's or stocks are damaged or destroyed as a result of accident, company have to pay for replacement, repairing or restocking of this loss. This equipment may include machinery, damaged building or destroyed products.
Recruitment Cost:
If the injured worker is disabled as a result of accident, then the company have to hire a new worker to fill his place. They have to pay recruitment agencies to hire a new worker with same level of competence as injured worker.
Overtime pay for replacement workers:
When a worker is injured, company need to hire a new employee in place of injured worker. As he will be new on site, he will take more time to complete the tasks. Company have to pay him for his overtime.
Training costs for new employees:
If the injured worker's injury is so bad that he can't return to work, then the company have to hire a new employee in place of him. Company have to train him to ensure his level of competence and speed up work as the injured person was doing.
Legal fees:
If the injured person file a legal case on company, saying that he is injured because of company's mistake then the company have to hire a lawyer to defend in court. In that case, company have to pay the fee of lawyer and other legal expenses to defend themselves.
Regulatory fines and penalties:
If the company made violation of safety rules and regulations, the court will impose fines and penalties on the organisation. These fines and penalties are directly linked with accident and company is responsible of paying this cost.
Insurance premium increases:
After the occurrence of the accident, company insurers might observe that the accident rate in increased in this organisation. They might increase the insurance premium and the company have to pay this every year.
What is Indirect Cost?
Indirect cost is not as clear as direct cost. It is a hidden or invisible cost that a company have to bear as a result of an accident. Indirect costs of accident could not be calculated easily. These are not as obvious as direct cost but they impose a significant impact on the base of company.
For Example:
If an accident is occurred in a company because of not managing health and safety properly. Company will face losses which include:
- Reduced productivity
- Reduced efficiency
- Decreased employee morale and motivation
- Increased turnover
- Absenteeism
- Damage to reputation and brand image
- Loss of business and customer goodwill
- Supervisor and manager time spent on incident investigation and reporting
- OSHA fines and penalties
- Increased insurance premiums
- Legal and consultation fees
- Costs associated with implementing new safety protocol
Reduced productivity and efficiency:
When an employee's get injured as a result of accident, other workers have to do extra work to achieve the goals and complete the task. It will lead to less work to be done. And as workers will do extra work, it will cause workload on workers resulting in mistake and bad quality work.
Decreased employee morale:
When accident occurs in any organisation, it create a sad environment in the workplace. Employees may feel upset and fear during work. This will demotivate employee's resulting in bad performance.
Increased turnover:
If company do not provide safe working environment to workers, the may do not feel safe in this organisation. Employees might decide to leave this organisation because to safety issue's. Company will have to pay for recruitment and training of new workers. Its an indirect expense that the company have to bear because of not managing health and safety.
Damage to reputation:
If a company has high accidents rate due safety issues, people may start to think it's not a safe or responsible place to work. This can hurt the company's reputation by converting public perception negatively and make it harder to attract customers.
Loss of customer:
If investors and customers hear about the health and safety issues and high accident rate of organisation, they will not invest in this company. They will start there business elsewhere. Nobody want to take risk on their investment.
Supervisor time spent on investigation:
When an accident has occurred then it is important to investigate it and find out the root cause. Its also a legal requirement to investigate the accident after its occurrence. Supervisor have to leave other important tasks and investigate the accident to know how the accident is occurred and how to prevent this in future?
Fines and Penalties:
Legal Fee:
Company may have to hire experts team to investigate the accident occurred in the workplace. Company have to pay their fee which an indirect expense of accident.
Costs of implementing new safety protocols:
To prevent future accidents, companies may need to make changes to their safety procedures or equipment. These changes can be costly but are important for safety.
