Constructing a building is a complicated process, one that involves a variety of players and parts. In general, the categories of costs can be broken into two broad groups. Soft costs in construction and development include a variety of inputs that aren’t obvious in the finished product but are necessary nonetheless. Hard costs include inputs directly related to the physical construction of the building.
What Are Considered Soft Costs in Construction?
Soft costs are indirect expenses that are related to a construction project but don’t actively impact the actual construction 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 dirt and continuing well after the certificate of occupancy has been granted. Some common examples:
- Planning: Planning and research is part of the development process. Examples include market research, environmental surveys, architectural blueprints, civil engineering services and landscape design.
- Administration: Administrative expenses don’t directly influence construction, but they’re still essential. Administrative expenses in construction can include software, administrative salaries, office equipment, accounting services and financing fees.
- Insurance: The premiums a developer pays to insurance carriers are required to operate legally, but they don’t directly affect the physical structure itself. Types of coverage include general liability insurance, builder’s risk insurance, commercial auto insurance, worker’s compensation coverage, property insurance and construction bonds.
- Regulatory expenses: As with insurance, regulatory fees are a mandatory expense that doesn’t show up in the finished product. The list includes zoning applications, construction permits, inspection fees and occupancy permits, along with fees for attorneys and consultants who guide the developer through the regulatory process.
- Real estate: Buying the dirt where construction will take place is an important expense for any construction project. This is considered a soft cost because land acquisition and real estate expenses can occur before and after a construction project. Types of real estate soft costs include site acquisition, environmental remediation and infrastructure costs such as road extensions.
What Are Considered Hard Costs in Construction?
Hard costs, also known as brick-and-mortar costs, are outlays directly related to the construction process. Hard costs usually refer to physical items you can touch and see.
Examples of Hard Costs in Construction
Common types of hard costs include:
- Raw materials: At the most fundamental level, hard costs are the physical inputs into a building. These include lumber, concrete, steel, nails, mortar, insulation and roofing tiles – essentially everything that makes a structure water-tight and air-tight. Hard costs apply not only to the structure itself but to the surrounding grounds, including asphalt, gravel, trees and bushes.
- Worker wages: Most construction projects require the on-site labor of tradesmen and laborers. Pay for employees, the general contractor and subcontractors are hard costs. Specialty workers can include plumbers, roofers, carpenters, excavators, electricians, landscapers and HVAC specialists.
- Equipment: Buying and maintaining equipment is a hard cost. Heavy machines, hand tools, scaffolds and safety equipment don’t stay with the building, but they’re still considered part of the budget of hard costs.
- Interior fixtures: Permanent aspects of a building’s interior design are hard costs. These can include appliances, cabinets, tile, counters, cabinets, paint, furnaces and pipes.
Differences Between Soft Costs vs Hard Costs
One important distinction is timing. Soft costs can begin long before construction and continue long after the building is complete. Hard costs, on the other hand, occur during the construction process. At the start of a project, contractors buy supplies and materials they will use to build the building. As other needs arise or inventory runs out, they spend more money on those hard costs. Wages for construction labor are another hard cost that begins and ends during the construction process.
Another distinction between soft costs and hard costs in construction is the eye test. Soft costs are often less obvious than hard costs, because they are often not visible. Soft construction costs are fees incurred in the construction of a building that are not directly related to labor and physical building materials. Hard costs, on the other hand,
How To Estimate Commercial Construction Costs
Soft costs are challenging to project because they can grow and change over time. When ballparking soft costs, it’s important 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 comparatively simple. Hard costs are tangible and predictable. For instance, your contractor should be able to forecast how much lumber and how many nails will be needed for your building. Materials costs can fluctuate, of course, but there is a ceiling on these costs. 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 Soft Costs of the Project?
Soft costs can come in all over the map – they can be as little as 25% and as much as 75% of the overall budget for the construction project. If your project involves modest costs for land acquisition and relatively straightforward design and approval, your soft costs will fall at the low end of the range. But if land is priced at a premium, or the approval process is complicated, or if you’re hiring a starchitect to design a landmark building, your soft costs will rise accordingly.
Bottom Line: Make Sure to Account for Both Hard and Soft Costs in Your Commercial Construction Project
It’s tempting to focus on the physical part of a construction project, but savvy investors remember that planning, design and approvals come with costs of their own. Both categories of expenditures are part of any construction project, and developers are wise to plan accordingly.