Construction companies struggle to make accurate budget forecasts because there are too many variables to consider. Market costs, fluctuating prices of materials, and labor costs can make it difficult to predict a project's cost accurately. However, creating a realistic budget that covers hard and soft costs can help control costs.
A reasonable budget must include all the various expenses to reduce wastage and delays. Knowing the difference between hard and soft construction costs is critical in developing a reasonable budget.
It is advisable to allocate more money towards soft costs as they are associated with hidden costs to avoid going over budget. Hard costs are directly related to the building, while soft costs are indirectly related to the building.
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What is the difference between hard and soft construction costs?
|Hard Costs||Soft costs|
|Are directly related to the development of a building.||They are indirectly related to the development of a building.|
|Generally tangible as it relates to assets or resources that the company must acquire to complete a project.||Generally intangible and can be incurred on behalf of the client.|
|Quantifiable and relatively easy to estimate.||Not easy to quantify or estimate.|
|Generally incurred during the construction stage.||Can be incurred before construction begins.|
Hard costs are easy to estimate because they are quantifiable. On the other hand, soft costs are unquantifiable and challenging to forecast as they occur throughout the project, from pre-construction to post-construction.
They are directly related to the actual construction of a building, while soft costs are not directly related to the physical construction of a building. Hard costs may include costs of materials and labor as these directly contribute to the completion of a building.
Hard costs are tangible as they are associated with the assets and resources required to complete a building. However, soft costs are intangible and less noticeable. Soft costs may be incurred on behalf of the client or otherwise.
Finally, hard costs only occur during construction and will never be incurred once a building is complete. On the contrary, soft costs can be incurred before, during, or after a project.
Examples of hard construction costs
Hard costs are the tangible costs associated with the building, construction site, and landscape. They are commonly referred to as “brick and mortar costs” as they are directly involved with the physical construction of a building.
They are easy to estimate because of their finite and tangible nature. Estimating hard costs involves listing all the needed raw materials, equipment, and interior finishes. The team can estimate the cost of labor through research.
The most obvious example of hard costs is the cost of raw materials. Raw materials are physically part of the structure under construction. These may include concrete, wood, gravel, insulation, steel, turf, nails, trees, and bushes.
Construction labor costs are also considered hard because labor is needed to build a structure. Labor costs may include excavation, landscaping, carpentry, electrical wiring, plumbing, and HVAC installation.
Acquiring new equipment or maintaining existing equipment is an example of hard costs. Equipment affects the ability of the construction team to work on the project. Equipment costs typically include purchasing safety equipment, scaffolding, hand tool purchases, and heavy machine rentals.
Interior fixtures are hard costs because they are required to finish a construction project and deliver the desired interior design. Interior fixtures include furnaces, cabinets, pipes, counters, appliances, tile, hardware, and paint.
Examples of soft construction costs
Soft costs are easy to overlook because they are intangible and difficult to estimate. Soft costs cover anything not directly related to the physical construction of a building.
Planning and research are soft costs incurred before construction begins. It includes the cost of conducting feasibility studies and hiring architects and engineers to develop floor plans. Planning costs also cover market research, environmental surveys, landscape design, and blueprint design.
Legal costs are essential to a construction business but do not directly impact a building. Legal costs may include zoning applications, inspection fees, attorney retainer fees, housing permits, commercial use permits, and occupancy permits.
Administrative expenses are another type of soft cost because they must be incurred to ensure proper project management. Administrative costs include salaries, equipment, accounting, construction software, taxes, and loan interests.
Real estate is physically related to a construction project but is considered a soft cost because real estate expenses can be incurred before and after a project. Real estate costs include purchasing land, renting or leasing space, road extensions, and remediation.
Insurance fees do not directly affect the construction of a new building, but they are mandatory. Insurance costs are ongoing costs and can be incurred after project completion. Insurance costs incurred by construction companies include general liability insurance, property insurance, worker’s compensation, risk insurance, construction bonds, and vehicle insurance.
Some construction projects cover the management and maintenance of the finished project, leading to ongoing soft costs. Long-term property management costs may include security, lease oversight, advertising, renovations, and landscaping maintenance.
A realistic budget is essential in ensuring the successful completion of a construction project. However, construction companies typically struggle to create realistic budgets due to the unpredictable nature of some costs. The first step to developing a realistic working budget is understanding the difference between hard and soft costs.