When it comes to constructing new buildings, expecting a ton of expenses is normal. Creating a construction budget and managing purchases requires an in-depth understanding of the types of costs involved, namely, hard costs and soft costs. Understanding hard costs vs soft costs will help you successfully coordinate and manage the construction project.
In this article, you will learn the concept behind soft costs and hard costs when it comes to construction costs and the role each plays in planning a construction budget.
Soft costs and hard costs are two classifications of construction spending that link an expense to a project. A construction budget that includes coverage for soft and hard costs makes it easy to account for every purchase throughout the project.
Hard costs refer to the type of spending that directly correlates to the physical construction of the project. They include renting machinery and paying workers to construct the building.
When Do Hard Costs Occur?
Hard costs generally occur throughout the construction process. At the beginning of a building project, construction companies buy all the materials and supplies needed for the project. If the inventory runs out or a need arises, the construction company spends additional money on the hard costs. Fees and employee salaries count as hard costs as they also continue throughout the construction process.
When the construction team completes the project, the hard costs stop. Invoices and bills are paid off from hard costs if they are incurred earlier in the construction process, but there will be no additional hard costs once the building is constructed.
Examples of Hard Costs
Hard construction costs are also called brick and mortar costs. Typically, these are direct construction costs incurred during the process as workers erect the structure. A few of the hard costs incurred during construction are:
Interior fixtures are permanent aspects of a construction’s interior design and are counted as hard costs. That’s because they are integral to completing a construction project since they are finishing and features that make the other raw materials functional and presentable.
A few examples of interior fixtures are:
If you need to purchase new equipment for a project, it can qualify as a hard cost. Additionally, maintenance costs for current equipment are also hard costs since they directly influence the team’s capability to work on the project.
It is also important to factor in the cost of the equipment when creating a budget to ensure you have enough funding to finish the project.
Some equipment hard costs are:
- Safety equipment
- Hand tool purchases
- Heavy machine rentals
Payment to laborers for their services is another hard cost since construction laborers physically work to contribute to the construction project. When creating a construction budget, you should estimate the cost of paying the laborers and sub-contractors.
A few examples of construction labor hard costs are:
- Site excavation
- HVAC installation
- Electrical wiring
These include the materials that make up the construction project or building. You can itemize anything that is physically part of the structure as a hard cost.
A few raw materials that qualify as hard costs are:
How to Estimate Hard Costs
Estimating hard construction costs is pretty straightforward since these expenses are typically predictable, tangible, and finite. Although some additional hard costs might occur if there are timeline overruns during the construction process, hard costs tend to be quite consistent.
It is possible to estimate hard costs by creating a list of the equipment and materials required for the project and then getting price quotes in your vicinity. The more challenging hard costs to predict are labor costs, which will require thoroughly researching how much labor costs per hour for the particular type of labor.
Soft costs refer to expenses not directly incurred when constructing a building. Safety inspections and legal fees are two excellent examples of soft costs.
Being able to categorize each expense as a hard or soft cost can enable you to understand how each part of construction relates to the overall budget, how to allocate resources, and how to finance the project.
When Do Soft Costs Occur?
Compared to hard costs, soft costs can happen at any moment; before, after, or even during the construction.
Construction projects tend to have a larger number of soft costs occur during the planning phase. That said, additional soft costs can occur during the management, inspection, and building stages.
Example of Soft Costs
Soft costs cover the entirety of a construction project and typically include the following:
Not every construction project covers the maintenance and management of a new building project. However, the ones that do will itemize additional continuous soft costs. If the financier of the construction project plans to maintain their property, then they will need to itemize property management soft costs into their overall budget.
The expenses incurred during property management count as soft costs because they support the building use rather than the actual construction.
A couple of property management-related soft costs include:
- Lease oversight
- Building repairs
- Landscaping maintenance
Purchasing land to site the construction project is another integral expense that a construction budget needs to cater to. While real estate can be termed as physically related to the construction project, it is also a soft cost since real estate development and land acquisition can happen before and after project completion.
A few of the soft costs associated with real estate associated are:
- Road extensions
- Environmental remediation
- Renting or leasing space
- Purchasing land
There are many legal considerations to factor in when creating a construction project. For one, the construction must meet the local property code. Legal fees are soft costs, even though they are integral to operating a construction business.
A few of the legal soft costs during construction include:
- Construction permits
- Inspection fees
- Occupancy permits
- Housing permits
- Filing fees
- Attorney retainer fees
- Commercial use permits
- Zoning applications
You can count insurance fees as soft costs since having insurance does not directly influence construction developments.
Construction insurance costs are typically ongoing, and they tend to continue even after the construction has ended.
Construction companies need various forms of insurance to protect both the company and its assets. These can include one or more of the following:
- General liability insurance
- Builder’s risk insurance
- Commercial auto insurance
- Construction bonds
- Worker’s compensation
- Property insurance
These expenses are operating costs incurred during the construction projects. These costs might not directly influence the construction process.
A construction budget must include information concerning how much you plan to put towards administrative materials and salaries to ensure the project remains compliant with regulations and well-organized.
A few of the administrative costs incurred during construction are:
- Accounting assistance
- Loan interest
- Office equipment
- Office staff salaries
- Business software
You can count the research and planning that goes into creating construction plans as a soft cost. These costs might include paying architects and engineers to conduct studies, develop plans, and research other variables before the commencement of a project.
Soft costs can also relate to the costs incurred by helping the construction team develop a vision for the construction project and also prepare for prospective construction procedures.
A few of the planning costs include:
- Environmental surveys
- Market research
- Blueprint development
- Civil engineering
- Landscape design
- Market research
- Environmental surveys
How to Estimate Soft Costs
Compared to hard costs, soft costs are a lot more challenging to predict since they can change and grow over time. When you are estimating soft costs, it is important to consider many hypothetical situations as well as forecast an array of prices you can expect.
For instance, if there happens to be a legal issue during the construction process, soft costs associated with a lawsuit can extend for many years even after the project has ended.
Construction budget experts recommend having a generous discretionary fund solely for soft costs to adapt for ongoing expenses and fluctuating needs.