Construction Soft Costs: Overview, Types, and the Best Practices for Managing Them
In construction, having a precise estimate serves as a building block for any project’s success. However, it is not only the bricks, cement, or wood that make up the entire cost. There are some intangible expenses hidden behind closed doors that are often overlooked. To help you make an accurate estimation for your project, we offer you a detailed guide about construction soft costs and how to manage soft costs.
Table of content
- What are Soft Costs in Construction
- What are Hard Costs in Construction
- Soft Costs VS Hard Costs
- Importance of Precisely Estimating Construction Soft Cost
- Types of Soft Costs
- Best Practices for Managing Soft Costs
- Final Thoughts
What are Soft Costs in Construction
Soft costs refer to the intangible construction expenses: they are not directly connected to the physical construction of the building. This may include design and development costs, administrative and legal costs, and financial costs. Soft costs are important constituents of construction budget management, requiring in-depth review, to ensure a project’s financial viability and overall success.
What are Construction Hard Costs
Hard costs refer to the tangible construction expenses. Those costs are directly connected to the physical construction of the building. Typical hard costs include material, labor, equipment rentals, and subcontracts. Generally, hard costs constitute a huge portion of the construction project and serve as essential components for the precise construction planning. Thus, it is important to carefully consider all the hard costs which will guarantee a successful construction project.
Soft Costs VS Hard Costs
Both soft costs and hard costs are essential for making accurate budget forecasts. While hard costs do account for up to 70% of the entire budget, soft costs should also be considered carefully as they will safeguard a project’s financial health.
Compared to soft costs, hard costs are easier to estimate since they revolve around material and labor. Soft costs also tend to change throughout the project lifecycle. Thus, having a detailed breakdown and constant budget monitoring will ensure that everything is going as estimated. However, this does not mean that soft costs are impossible to estimate or track.
Importance of Precisely Estimating Construction Soft Cost
Miscalculating construction soft costs even by a small margin can significantly affect a project’s liveliness and financial standing. Very often construction soft costs are underestimated, which may lead to budget overruns. To reduce the risks of such encounters, it is necessary to properly plan everything and consistently monitor the budget.
While budget overruns do seem easy to control during the early stages of estimating, those costs may build up later, eventually resulting in significant financial tension. This, in turn, may affect the decision-making of homebuilders, forcing them to redirect funds from other project areas. It can even cease construction projects until additional financial resources are available.
Types of Soft Costs
Depending on the construction project and its scope, the types of soft costs can be different. A certain type of soft cost included in one project might be irrelevant for the other, and vice versa. The scope of projects can vary significantly, and so do construction soft costs.
Below are various types of soft costs that are usually found in construction projects.
Design and Development Cost
Generally, design and development costs emerge during the construction planning phase. Such costs include:
- Engineering and architectural costs: These refer to the expenses given to various professionals responsible for the project’s design. It also includes subconsultants specializing in diverse spheres, such as mechanical, structural, and electrical engineering. These people are responsible for ensuring that the final project is both aesthetically pleasing and functional.
- Feasibility studies: These include the assessment of the project, analyzing its practicality, and ensuring the project realistically can be implemented in practice. Its assessment typically includes evaluating market demands, financial performance, and potential risks. Feasibility studies are essential as they have an impact on decision-making, and can significantly affect the project’s success.
- Site evaluation and surveys: These relate to the costs of performing soil tests and topographical surveys. They are essential constituents of the preconstruction phase of the project. Conducting site evaluations and surveys will give enough information about the site, helping builders make the right decision.
Financing Costs
Financing a construction project usually comes with its expenses. Below are the costs associated with financing.
- Loan origination fees: These allude to the fees that are charged by banks or financial institutions to process and establish a loan for the given construction project.
- Interest in construction loans: In major construction projects, when financing is required, accrued interest on the loans may pile up, especially if there are unforeseen project delays. Generally, interest in construction loans is offered in the short term, and including it in the budget during the preconstruction phase of the project will ensure accurate project cost estimation.
Legal and Administrative Costs
Typical legal and administrative costs include:
- Legal fees: These refer to the costs of legal needs related to the given construction project. Usually it may arise from dispute resolutions or from contract negotiations.
- Insurance fees: These are related to various insurance coverages which include but are not limited to general liability insurance, workers’ compensation insurance, professional liability insurance, and automobile liability insurance.
- Taxes: Depending on the location and the scope of the project there may be various taxes applicable. It is recommended to consult with a tax advisor to receive guidance and understand the specific taxes that will be required for the given project.
- Licenses and permits: These usually arise during the preconstruction phase of the project. Securing all the necessary licenses and permits ensures the construction project meets all the local or regional requirements.
Operational and Miscellaneous Costs
As construction projects progress and move forward to their next stages, many other expenses may come to light. These include:
- Marketing and advertising fees: These refer to the fees required for advertising the building. While these costs do not directly contribute to the physical construction of the building, they are essential for attracting customers, ultimately contributing to the project success.
- Project management fees: These represent the cost of hiring skilled project managers or project management teams responsible for coordinating various aspects of the project. Project management fees are important constituents of construction soft costs as they guarantee smooth delivery of the project, without any unexpected delays.
- Consultancy fees: These cover the cost of hiring external employees who will offer specialized expertise throughout various stages of the construction project. While they are not full-time employees, they serve an important role in ensuring that all the technical aspects of the project are well managed.
Best Practices for Accurately Calculating Construction Soft Costs
While invisible, construction soft costs are an important component of the construction budgeting, and can significantly affect the overall success of the project. Its precise estimation is pivotal for financial stability. To help you understand how to accurately estimate construction soft costs, we have identified the best practices utilized by many industry leaders.
Accurate Budgeting and Planning
Step-by-step and precise planning is a cornerstone for the success of your project. Working on the budgeting during the preconstruction period will help you minimize the risk of any unexpected expenses later throughout the project.
- Organization: In contrast to hard costs, which are usually black and white, soft costs are rather vague. Due to its ambiguous nature, very often the chances of skipping some of those become inevitable. Thus, it is a necessity to carefully consider and itemize each of those potential costs that may arise. Categorizing and paying attention to each of the soft-cost items will allow builders to anticipate expenses without having any budget overruns. Many construction software companies ensure that all their costs are categorized properly and are clearly listed in their estimates, allowing builders to see where the given expenses are allocated.
- Plan for Contingencies: While hard costs are relatively easier to predict, soft costs are not. For instance, if in case of hard cost, it might be easy to estimate the amount of bricks for the construction, it might be difficult to anticipate how long permitting will take. Therefore, it will be a wise strategy to designate a contingency for soft costs. Very often construction companies rely on the construction allowances to prevent their budgets from unpredicted cost overruns. Construction managers have the option to easily set their allowances as necessary.
- Communication: Keeping good communication within the team will ensure that the project does not exceed its budget. Engaging various experts and professionals in the technical aspects of the project will allow the team to share their perspectives and insights, and ultimately come up with a realistic and accurate soft cost estimation. Creating an RFI can be a great approach for keeping good communication within the team. This will allow you to come up with a comprehensive cost estimation, and ensure that there will not be any budget overruns.
Formulate Clear Contracts
Contract formulation is one of the most important parts of construction projects. It serves as a building block for managing soft costs. A well-structured contract can help you anticipate these costs, while vaguely-drafted contracts can lead to budget overflow. Below we will explore three steps that will allow you to come up with a carefully drafted contract.
- Determine Scope of Work
Understanding the scope of the project will help you pinpoint soft costs that are associated with design, planning, and more. A lack of a clearly defined scope can lead to potential changes in the entire project, leading to additional soft costs.
- Identify Protocols
Identifying protocols and establishing all the necessary guidelines serve as an important strategy for ensuring a construction project’s success. Especially, for managing soft costs, it is of utmost importance to carefully consider documentation protocols as it will allow you to establish how contracts and permits will be shared or tracked throughout the project.
- Define Liability
Another important practice for accurately calculating soft costs is defining its liabilities. Including specific terms and referring them to the person responsible for regulatory compliance and permits will ensure that everything runs smoothly. Missing this important step in the construction projects may lead to final and legal complication, and result in budget overruns.
Hire Skilled and Experienced Professionals
Having skilled and experienced professionals throughout construction projects is pivotal. Construction teams of qualified specialists can bring their unique expertise and perspectives to the table. Based on their previous experiences, they might anticipate challenges as well as costs that were not evident during the preconstruction phase of the project.
For instance, if the architect has previously worked in a similar construction site, they may recognize potential changes, such as soil conditions. This will allow them to take the necessary measures on time, such as surveying or geographical testing, ultimately identifying soft costs on time.
Improved Cost Tracking with Construction Software
There are a lot of construction management software solutions that make it easy to track both construction soft costs and hard costs. With a bunch of tools offered by such software, stakeholders can monitor their project expenses. This will allow them to notice potential budget overruns, take precautions, and make all the necessary adjustments to prevent such issues.
Construction cost tracking, is a process of monitoring and working with the costs related to construction. It offers all the necessary information about the money used throughout the project and the specific things that it was allocated to. Cost tracking includes analyzing and recording both the earned and spent money, ensuring that you stay within your budget.
To simplify this process, it is recommended to have a contingency plan for all your unknown expenses. With the right construction cost-tracking software in your hand, you will have all the necessary information to make informed decisions and stay within the allocated budget.
Final Thoughts
Estimation is one of the most important parts of a construction project, being the foundation for a successful outcome. By equally prioritizing hard and soft costs, you set your project up for financial stability, avoiding unpleasant surprises.
Invest in the right tools for construction estimating and budgeting to ensure accuracy in calculations and have access to real-time insights into your project costs. With the proper tools, you can easily track expenses, forecast potential financial challenges, and make data-driven decisions. This not only helps to maintain your budget but also enhances efficiency and reduces the risk of costly errors.
