Describes the capacity of a system to carry load beyond its actual capability.
Scenario 1: Charlie got a contractor job to build a bridge in his hometown, Wisetown. He won the bid because he accounts for margin of safety in his project. The bridge will limit the capacity to 1000 pounds but can actually handle 1200 pounds. The extra 20% leaves a sizable margin of safety to carry extra load on the bridge avoiding any unexpected error.
Scenario 2: Charlene lost a job because she showed up late. If she would have left 20 minutes earlier for her job interview, she could have accounted for extra traffic, but she left herself zero margin of safety. Charlene now allows herself enough time for things to go wrong because something always does such as traffic, construction during summer or running out of gas (how?!).
What is Margin of Safety?
Margin of safety originated from engineering but is applicable to any system. Describes the capacity of a system to carry loads beyond its actual capability. When designing such systems, the system should be able to support additional loads which are calculated using detailed analysis.
The primary question posed by this concept is how much stronger the system is than it usually needs to be for an intended load. Testing can be impractical when complex systems such as aircraft, buildings or bridges are involved. However, the structure’s ability to carry load must be determined to a reasonable accuracy by conducting a detailed analysis to avoid any unexpected failure.
Building codes have a long history dating back to 1772 BC in Code of Hammurabi (a well-preserved Babylonian code of law of ancient Mesopotamia), but in the 19th century, the main structural material was iron to construct buildings. Steel-framed buildings were increasing in popularity following the development of tall skyscraper buildings in America. A major steel producer company, Dorman Long began rolling steel in Britain around 1880 because the use of cast and wrought iron became uneconomical. Source: A history of building control
The economics use of steel depends upon quality and its working stress. Structures have two main problems, buckling and bending, and theories in calculating these two properties in steel were established in 1759 and 1826. To arrive at a reasonable working stress, a Factor of Safety against failure was assessed and this was generally taken as a quarter of the average ultimate strength of material. London City Council determined the working stress of steel and introduced a higher Factor of Safety to allow for imperfections in the material.
Factor of Safety has evolved and even introduced in other industries. Today, the Federal Airworthiness Regulation Part 25.303 – Factor of Safety states: “Unless otherwise specified, a factor of 1.5 must be applied to the prescribed limit loads which are considered external loads on the structure. This is enforced by civilian and military transport authorities and has the force of law within the United States.” Source: NASA
Margin of safety originated from engineering. Many structural projects within government and private sector apply Factor of Safety (FoS) to ensure the structural safety.
In engineering, a factor of safety (FoS), also known as (and used interchangeably with) safety factor (SF), expresses how much stronger a system is than it needs to be for an intended load. Safety factors are often calculated using detailed analysis because comprehensive testing is impractical on many projects, such as bridges and buildings, but the structure's ability to carry a load must be determined to a reasonable accuracy. Many systems are intentionally built much stronger than needed for normal usage to allow for emergency situations, unexpected loads, misuse, or degradation (reliability). Source: Wikipedia
In its original form, a quantitative “margin of safety” is in fact called a “safety factor.” In structural engineering, the safety factor is calculated as follows:
- Calculated by dividing the load required to cause failure by the maximum load expected to act on a structure.
- A system with capacity of 6,000 pounds is used to carry no more than 1,000 pounds at a time, then the factor of safety is 6,000 / 1,000 = 6.
The above calculation is generalized to explain the concept. However, between various industries and engineering groups usage is inconsistent and confusing. The concept is heavily used in aerospace and industrial projects but not limited to those industries. Just like Factor of Safety, Margin of Safety is a widely known concept within the business world whether investing in a new project or personal investing. Margin of Safety allows room for an analytical error or bad luck to avoid sizable losses over time. Investing in future is unpredictable and margin of safety allows to protect us from that bad luck. Applying this concept in managing money protects any unexpected downside if the business or stock market were to tumble.
Clearly, the margin of safety model is very powerful, and we’re wise to use it whenever possible to avoid failure. But it has limitations.
If time and money are the most important resources, does it make sense to utilize those resources to fail-proof a material to such an extent that any extra unit spent on making it safe does not make it safer? For example, how do you account for weather conditions? Or, how do you account for future government policies when you are investing in a stock market? In both instances, while doing analysis, you have to realize we do not have control over external factors which makes it hard to fail-proof a structure or a system.
While also conducting detailed analysis, you have to ensure the biases baked into data or old set of data that is no longer relevant.
Judgement is another one. When it comes to things like terrorist attacks, people are not concerned about false alarms. However, using probability of an event can suggest a likelihood of an event such as terroristic attack is very low.
The margin-of-safety calculation can be exaggerated without careful judgment.
Once upon a time, Charlie decided to open up a lemonade stand over a summer break. He would buy lemons only when they were on sale but would never pay a full price or a price that would not meet his margin of safety criteria. He understood that paying less for lemons will make him the most profit so he can buy himself more ice-cream.
On the other hand, his friend, Charlene, who he secretly liked, would buy lemons at any price. Charlene never factored in margin of safety, the more she paid for lemons, the less her profit. This led to closing the lemonade stand early because she never factored in the downside.
However, Charlie was generous enough to buy ice-cream for Charlene. It might have been for other reasons.
Charlie understood that a lemon worth $1 today could be worth 75 cents or $1.25 in the near future. He also understood that he might even be wrong about its value. Therefore Charlie had no interest in paying $1 for $1 of value. He would purchase lemons only if they were discounted substantially below its market value. Otherwise he knew he would experience losses. The discount on lemons provided a margin of safety.
Charlie finally convinced Charlene to go on a date and promised to share ice-cream with her. He also shared lessons with her to protect her lemonade stand from downside. Both won the best business award the following year in Wisetown.
Margin of safety is used widely in many areas of life such as accounting, engineering, investing and time management to name just a few.
Business: if you are running a small business, maintain an emergency fund for an unplanned expense or decline in revenue.
Sports: If you are training for a marathon, stay away from running extra miles that does not contribute to results. These extra miles carry no psychological benefits and could lead to an injury. Knowing how much load your body can carry and applying margin of safety to prevent any unexpected injury is beneficial to athletes in a long-term.