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Formal cost allocation programs can reduce costs for restaurants

Having a formal cost allocation system allows companies to identify potential incident trends. Learn more in our 2024 Restaurant Loss Cost Trends report.

03/04/2025 · 3 minute read

A formal cost allocation system allows restaurant companies to identify potential incident trends in individual locations, helping them to adapt their risk management strategies to reduce specific losses. But investing in a formal cost allocation system requires specialized expertise, which can strain risk management resources. Is the potential payoff worth the investment?

What are the benefits of creating a formal cost allocation system?

According to the 2024 Restaurant Loss Cost Trends report, conducted by Marsh in collaboration with Oliver Wyman, holding location managers accountable for the impact of workers’ compensation and general liability claims through a formal cost allocation system contributes to lower losses. Benefits include:

  • Incentivizing loss control. Location managers are encouraged to take ownership of their loss performance, which may lead to proactive risk management.
  • Reducing claim cost and severity. Enhanced risk management actions could result in a reduction in the cost and severity of claims.
  • Transforming safety culture. Initiatives aimed at improving loss performance often result in a stronger culture of safety and accountability.

90%

of restaurant company respondents with a formal cost allocation system tend to have a lower percentage of large claims

See below charts

Workers’ compensation claims

General liability claims

What are the financial impacts of cost allocation systems?

Our research found that restaurant participants utilizing a formal cost allocation system observed general liability large claim severities (claims over $100,000) that were 10% lower than peers without an allocation system.

When it comes to workers’ compensation programs, a formal cost allocation system tends to have the greatest impact on small claims (defined as ranging between $1,000 and $25,000).

For many companies this could translate to hundreds of thousands of dollars in aggregate annual savings.

$250,000

Average large general liability claim cost 

$25,000

Potential savings per loss with a formal cost allocation system

$4,500

Average small workers’ compensation claim cost

$500

Potential savings per loss with a formal cost allocation system

A cost allocation system can lead to average savings of:

  • $25,000 for large general liability losses
  • $500 for each small workers’ compensation loss

Despite these benefits, only 25% of survey respondents said their location managers are held accountable for the impact of workers’ compensation and general liability claims through a formal cost allocation system.

What are the barriers to implementation?

Considering the potential benefits and financial impact, what is keeping restaurant companies from implementing a formal cost allocation system?

  • Administrative burden. The complexity of tracking and managing claims can deter organizations from implementing a formal system.
  • Lack of awareness. Senior leaders may not fully understand the benefits or the process of implementing such a system.
  • Resistance to change. Concerns regarding the impact of a cost allocation system on managers' bonuses can instill reluctance to adopt new practices.

3 steps to develop a cost allocation system

Restaurant companies interested in developing a formal cost allocation system should consider the following actions to get started.

  1. Assess current practices. Start by evaluating your existing claims distribution and identify areas for improvement.
  2. Secure stakeholder engagement. Involve appropriate colleagues, such as senior leadership, operations, human resources, and finance teams to ensure buy-in and alignment on system objectives.
  3. Establish a clear roadmap. Develop a comprehensive strategy that details steps that will be taken to track claims, measure performance, and communicate results to all stakeholders.

Take the next step

Managing your claim costs is a critical element to driving down your total cost of risk.

Marsh’s team of specialists can help you better understand how a formal cost allocation system can benefit your organization and tailor a program that helps you track claims and extract actionable insights to help you reach your business goals.

*Source: 2024 Restaurant Loss Cost Trends Report

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