Cost avoidance is defined by any action taken in the present that prevents incurring greater costs in the future. For example, routinely investing in machine safety to remain in compliance with safety regulations is a form of cost avoidance. Unlike immediate cost savings, cost avoidance measures are not reflected in financial statements or annual budgets. They are nevertheless important to a company's profitability. When cost avoidance is not exercised, companies can face several potentially catastrophic expenses.
These include:
- Lost time wages and lost customers due to production constraints
- Increased worker’s compensation rates
- Medical bills
- OSHA fines
- Litigation and settlements
These costs can be unrecoverable and cannot be forecast due to the large number of unknown and unpredictable factors that can contribute to an incident.
