Construction is a complicated process. Developing a building involves various players and materials from before it starts to after its finished. Development costs can be divided into two categories: hard and soft.
Learning more about these costs gives investors a better understanding of what goes into construction and development; with that improved understanding, investors are better equipped to make smarter financial decisions on properties.
Explore hard and soft costs in real estate construction and development so you have a better eye for real estate investments.
What Are Soft Costs in Construction?
Soft costs are indirect expenses in the construction process. Though they are necessarily related to the project, soft costs do not have an impact on the physical building process.
These include everything from the computer in the developer’s office to the liability insurance that covers the construction site.
Examples of Soft Costs in Construction
Soft costs are incurred throughout the construction process—starting well before the first shovel hits the dirt and continuing well after the certificate of occupancy has been granted.
Here are a few essential soft costs you should know:
- Regulatory expenses
Development takes a lot of planning before construction can begin. Common examples of soft costs in the planning stage include market research, environmental surveys, architectural templates, engineering fees, and landscape design.
Without effective administration, developments would never get off the ground—a clear administrative vision is critical to the construction process.
Administrative expenses in construction may include software, executive salaries, project management, accounting services, and financing fees—the more favorable your financing options, the better the soft cost budget will be.
Developers are required to pay for job site insurance to operate legally. Insurance payments are a necessary soft cost in construction.
Types of coverage include general liability insurance, builder’s risk insurance, commercial auto insurance, worker’s compensation coverage, property insurance, and construction bonds.
Like insurance, regulatory expenses are necessary costs that don’t physically appear in the finished product but are nevertheless a crucial part of safe, legal operation.
Developers often consider regulatory expenses such as zoning applications, construction permits, inspection fees, and occupancy permits. Regulatory expenses may also include costs for attorneys and consultants who advise developers through the regulatory process.
Perhaps the most critical expense developers should consider is the physical land upon which the building will be constructed.
Many consider land a soft cost because land acquisition and real estate expenses may occur before a construction project starts and after it ends. Types of real estate soft costs include site acquisition, environmental remediation, and infrastructure costs such as road extensions.
What Are Hard Costs in Construction & Development?
Hard costs are outlays that are directly related to the construction process itself. Colloquially known as brick-and-mortar costs in the construction industry, hard costs typically refer to material items or tangible processes that can be touched and seen.
Examples of Hard Costs in Construction
Whereas soft costs generally occur throughout development, hard costs often occur during the physical construction of the building. Here are typical hard costs you can expect to encounter at a job site:
- Raw Materials
- Labor Costs
- Interior Fixtures
Perhaps the most physical representation of hard costs is the raw materials that make up the physical construction of the building. These fees may refer to various construction materials: lumber, concrete, steel, nails, mortar, insulation, and roofing tiles; essentially, everything that makes a structure stand, function, and remain safe and accessible.
Hard costs apply to the structure and surrounding grounds, including asphalt, mulch, trees, and bushes. If it is a physical building material on the construction site, it’s likely considered raw material.
Construction is a process that can’t be completed without the labor force doing the building. Construction projects require the on-site labor of tradespeople and laborers. Labor costs pay for the site work and the general contractor and subcontractors.
Labor costs are considered hard costs because they directly impact the physical construction of the building. Specialty workers include plumbers, roofers, carpenters, excavators, electricians, landscapers, and HVAC specialists.
The more complicated the building, the more labor it takes to put it together.
Because of its direct impact on construction, buying and maintaining equipment is a hard cost. Like labor, equipment used in day-to-day construction is physically related to a building’s development.
Equipment may refer to a wide range of objects: heavy machinery, hand tools, scaffolds, and safety equipment are all considered on-site equipment. Though they don’t remain when the building is completed, equipment is still considered part of the budget of hard costs because they are integral to its physical construction.
A building is much more than just the walls, stairways, and roofing that make up its physical structure; it’s what is inside that matters. Interior fixtures in the building are just as physically important—that’s why they are considered hard costs.
Permanent aspects of a building’s interior design are an essential part of a finished development. Interior fixtures may include appliances, electrical work, tiling, counters, cabinets, paint, furnaces, and plumbing.
What Is the Difference Between Soft Costs vs. Hard Costs?
The most distinctive difference between soft and hard costs is timing. Soft costs can begin long before construction and continue after the building is complete. These indirect expenses influence development outside of the actual construction.
Alternatively, hard costs must necessarily occur during the construction process itself. Hard costs refer to the physical parts of development—the actual construction of the building.
Another distinction between soft and hard costs in construction is the eye test: if you can physically see it, it’s probably a hard cost; if you can’t, it’s likely a soft cost. Soft costs aren’t as physically apparent as hard costs because they are intangible.
How To Estimate Commercial Construction Costs
Soft costs are challenging to estimate because they are susceptible to change over time. When ballparking soft costs, it’s essential to consider various potential situations and forecast a range of prices to expect. For instance, if a legal dispute erupts during construction, you could pay related soft costs for years.
Estimating hard costs is more straightforward in comparison. Hard costs are tangible and predictable. For instance, a contractor should be able to forecast how much lumber and how many nails you’ll need for a building.
While materials costs can fluctuate, they have a ceiling that developers can account for. Wages can be a bit trickier, but experienced contractors have a feel for how long construction will take and how many hours of paid labor will be required to finish the job.
What Percentage of the Construction Cost Is Reasonable for the Project’s Soft Costs?
Soft costs can constitute a wide range of expenses on a project budget; they can be as little as 25% and as much as 75%. The soft costs in the final project budget depend upon the level of engagement in the construction process.
If your project consists of modest costs for land acquisition and relatively straightforward design and approval, soft costs will fall at the low end of the range.
However, if the land is priced at a premium, the approval process is complicated, or if you’re hiring a starchitect to design a landmark building, your soft costs will rise accordingly.
Hard costs are more straightforward—they account for the physical construction of the building. While unexpected market trends may stall the construction process and balloon the hard costs, these ballooning expenses are often absorbed into the soft cost budget.
Bottom Line: Make Sure To Account for Both Hard & Soft Costs in Your Commercial Construction Project
It’s easy to focus on the physical components of a construction budget, but savvy investors know that planning, design, and approvals come with costs.
Both hard and soft costs are integral parts of any construction project. The more developers familiarize themselves with these costs, the better equipped they are to minimize them.