Calculating the cost of sales – easy. Calculating production costs – easy. But calculating the true cost of a recall? That’s where things get complicated. For both accounting and recall insurance purposes, understanding the full financial impact of a recall is essential—but elusive.

Breaking Down Recall Costs

A recall’s direct costs can typically be categorized into three main areas:

1. Product Costs – Credits, replacement products, and associated losses.
2. Internal Administration Costs – Labor for research, documentation, customer notifications, and support.
3. External Costs – Third-party services, customer charges, disposal, and compliance-related expenses.

1. Product Costs: The Most Predictable Expense

Among recall costs, product-related expenses are often the easiest to anticipate and quantify. These typically include:

• Credits for recalled products, whether returned, discarded, or donated. These are usually based on pre-negotiated rates, such as full retail, cost-plus, or a swell allowance.
• Replacement Products, which may lead to unplanned expenses in production, labor scheduling, and logistics.
• Market Disruption – Research suggests that getting replacement products back on the shelves quickly minimizes lost sales and market share. Delays can lead to compounding financial losses.

2. Internal Administration Costs: The Hidden Drain on Resources

One of the most overlooked recall costs is internal labor. Many companies assume these expenses are negligible because existing staff manage the process. However, recalls require substantial personnel time across multiple departments, including:

• Quality Assurance/Food Safety
• Customer Service
• Procurement/Logistics
• Operations (corporate, distribution centers, retail locations)
• Communications
• Legal
• Finance

Calculating an appropriate hourly rate for all involved personnel and applying a fully loaded labor cost ensures accurate financial assessments.

3. External Costs: The Most Unpredictable Factor

External costs vary widely depending on the recall’s nature, supply chain complexity, and customer agreements. These costs may include:

• Third-party effectiveness audits to verify compliance and resolution.
• Customer-imposed fees, including chargebacks and penalties for processing recalled products.
• Disposal costs, such as transportation, landfill fees, or verified product destruction.
• Lab testing for product safety evaluations.
• Operational adjustments, such as equipment modifications or procedural changes.
• Consulting or legal fees incurred in resolving recall-related issues.

The grand total? Research has found that, on average, a recall costs food and consumer product companies $10 million—excluding brand damage and lost sales – but these studies are nearing a decade old. New reports are citing anywhere from $3 million to $72.7 million depending on type and size of the company.

The Bottom Line: Plan for Recall Costs Before They Happen

The most affordable recall is the one that never happens—good food safety practices are the best way to minimize recall costs. However, when prevention isn't enough, preparation is key. A proactive recall plan can significantly reduce financial exposure when recalls do occur. 

Conduct an inventory of your recall process and associated costs to make informed business decisions about cost-saving improvements. Mock recall simulations are a wise investment, helping identify weaknesses in the recall process and improving efficiency in real events. Technology tools like Recall InfoLink streamline the process by reducing labor, speeding up notification, and protecting your brand—cutting recall costs to a fraction of what they would otherwise be. 

Understanding and documenting recall-related expenses is crucial to uncovering the true cost of a recall. Without accurate financial assessment, businesses risk underestimating the impact on operations, reputation, and long-term viability. The true cost of a recall can be hard to quantify and harder to avoid. By taking proactive steps today, businesses can protect their brand, their customers, and their bottom line tomorrow.