Fundamentals of Risk Management

Cost containment
When a hazard risk materializes despite the efforts put into loss prevention and the 
efforts that have been put into damage limitation, there may well still be a need to 
contain the cost of the event. For example, among the activities for minimizing costs 
associated with serious fires are detailed arrangements for salvage and arrangements 
for decontamination of specialist items that have suffered water or smoke damage.
Cost containment in relation to a fire will also include arrangements for specialist 
recovery services. The actions that will be taken to ensure that post-incident costs
are minimized should all be set out in business continuity, disaster recovery and crisis 
management plans, as appropriate. The topics of business continuity planning and 
disaster recovery planning are considered in more detail in Chapter 18.
A further consideration relevant to cost containment after an incident is what 
insurance companies refer to as ‘increased cost of operation’. Most material damage/
business interruption insurance policies will allow for payment of increased cost of 

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operation. This may arise when an organization has to sub-contract certain produc-
tion activities, or has to undertake manufacturing work at another one of its factories, 
which may be located some distance away.
If a manufacturer discovers that faulty goods have been released into the market-
place, a number of actions become necessary. The organization should have developed 
plans in advance of the event for notifying customers of the fact that faulty goods
are in the marketplace and how to identify them. The box below considers the
importance of product recall in these circumstances.
Any company or organization that manufactures, assembles, processes, wholesales or retails 
products could be financially impacted by the direct or indirect costs of a product recall. 
Direct costs can include wages for staff who have to implement the recall plan. Other direct 
costs include communications and this could entail purchasing air time on radio and 
television and notices in newspapers or industry publications.
Indirect costs can include lost production time for staff who must focus on the recall 
process, as well as the hiring of temporary employees to ensure continued production. 
However, the greatest indirect cost is the impact that adverse publicity could have on market 
share. A product recall should be designed to:
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protect the customer from bodily injury or property damage;
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remove the product from the market and from production;
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comply with specific regulatory requirements;
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protect the assets of the company.
Product recall risk management

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