Understanding the distinction between hard and soft costs is crucial for effectively managing budgets and ensuring the financial health of construction projects. Hard Costs are all those expenses directly related to constructing a project such as the labor, brick, mortar, and other materials. In contrast, Soft Costs are expenses indirectly related to the project's construction, such as Architectural fees and permit fees.
We’ll clarify and define these terms in the following article but if you walk away with nothing else, know that softs costs are typically strategic (project items requiring mental muscle) while hard costs are tactical (project items requiring physical muscle).
Let’s go a little deeper on all this.
Hard Cost vs Soft Cost are two basic terms commonly used in the proforma (project budget) of a project to separate two distinct categories from the development's total budget.
In any construction project's proforma, you should find a total soft costs line and another of hard costs. Both terms can be confusing, and while the definition is clear, in practice, the line separating them can be blurry at times. Furthermore, the proportion between both varies on each project.
The difference between both terms is sometimes blurry due to the included items in the General Contractor's budget. For instance, subcontractors' sub-permit fees, such as plumbing work, are paid by the General Contractor and included in their estimate, therefore added as part of the hard cost section. It's rare and unadvised to split the General Contractor's budget in soft and hard cost - unless it's a Design-Builder.
As mentioned previously, hard costs - for the construction industry, are all those expenses directly related to the physical construction of a project; materials, fixtures, construction labor, shipping, etc.
Hard Costs encompass all expenses directly tied to the physical construction of a project, often referred to as "brick-and-mortar" costs. These expenses are fundamental to building the actual structure and typically constitute a significant portion of the project budget. They include essential items such as building materials like steel, concrete, lumber, bricks, glass, drywall, paint, flooring, and insulation. Labor costs for construction workers, subcontractors, carpenters, electricians, plumbers, and masons directly involved in the building process are also part of hard costs.
Additionally, expenses for equipment and machinery such as cranes, bulldozers, scaffolding, power tools, and the installation of utilities like electricity, plumbing, and HVAC systems are considered hard costs. Interior finishes such as cabinetry, countertops, lighting fixtures, doors, windows, and paint also fall under this category.
In a preliminary proforma, hard costs are usually broken down into the building construction itself, built over the site, and the site work and landscaping work varies depending on the site itself. A larger lot will require more landscaping and site work than a smaller one.
Soft costs for the construction industry, on the other hand, are costs indirectly related to the construction of a project, but no less relevant as they are necessary for the project development such as the design, legal, financing, and administrative expenses. Soft costs are expenses indirectly related to the project's construction but are crucial for its planning, management, and completion. These costs include fees paid to architects, engineers, and interior designers for designing blueprints, structural plans, and aesthetic aspects of the project. Soft costs also encompass expenditures for obtaining permits, licenses, and inspections from local authorities, including zoning fees and building permit fees. Payments for professional services provided by consultants, lawyers, and other advisors, as well as expenses related to insurance, project management, and financing, are all considered soft costs.
While they do not directly contribute to the physical building process, effective management of soft costs is essential for ensuring regulatory compliance, financial stability, and successful project execution. Most soft costs are performed before breaking ground as they are the first steps to developing a project.
The soft costs of a project can vary immensely due to many factors such as the development type, size, use, location, etc. As most soft cost expenses are made in the initial phase of a project –the Design phase– accurately defining these costs at the early stages is critical to a successful and stress-free project. In-depth research is always recommended, such as a Feasibility Study, before committing to a full design team without a completed analysis of the Scope of Work.
This article covered essential points and explained the most significant differences between Hard Cost vs Soft Cost. As mentioned, they can quickly become more complicated than anticipated. The examples listed are not the only expenses you may encounter as we can't assume every issue or condition a project may face.
When preparing a project's Proforma, or project budget, these lines should always be present. However, and without adequate research on the project's requirements, needs, and wants, most numbers will be difficult to pinpoint.
We will always recommend starting a project with in-depth research such as a Feasibility Study. Check out what this study includes or contact us for a free Guideline Session, and start with your project with the right foot!
Hard costs refer to the direct expenses related to the physical construction of a building, such as materials (like steel, concrete, and lumber), labor, and heavy equipment. Soft costs, on the other hand, include indirect expenses like project management, design fees, permits, insurance (including liability insurance and professional liability insurance), and loan interest.
Hard costs, which encompass expenses such as building materials, labor wages, and subcontractor fees, are a significant portion of the construction budget. These costs are easier to estimate and control, directly influencing the project's profitability and return on investment.
Including both hard and soft costs in a feasibility study is important to provide a comprehensive understanding of the total project expenses. This ensures accurate budgeting, helps in securing funding or loans from banks, and provides a clear picture of the potential return on investment.
Hard costs like materials (wood, steel, concrete) and labor directly impact the project's schedule and profitability. Delays in material procurement or labor shortages can extend the project timeline and increase costs, thereby reducing the profit margin and affecting the overall financial viability of the project.
Examples of often overlooked soft costs include marketing and advertising expenses, professional liability insurance, legal fees, inspection fees, property tax, utility connections (electricity, water), and maintenance costs. Failing to account for these can lead to budget overruns and financial discrepancies.
Differentiating between hard and soft costs during the construction bidding process is essential to provide a transparent and detailed cost breakdown. This allows for accurate pricing, better financial planning, and more effective negotiations with stakeholders, ensuring all aspects of the project are accounted for and properly funded.
Proper insurance coverage, including liability insurance, property insurance, and vehicle insurance, is significant for mitigating risks and protecting assets. It covers potential damages, accidents, and legal liabilities, ensuring the financial stability of the project and compliance with regulatory requirements.
