Estimating the total cost of a construction project is never easy. However, it’s made much harder when the soft costs of a construction project are not given the correct consideration. So what are soft costs in construction? Soft costs can make up anywhere from 25 to 75% of the entire cost of a construction project. Whether you are building a skyscraper or a shed, understanding what soft costs are and how they impact your budget is crucial. Let’s take a look at what soft costs in construction are, and how to properly account for soft costs in construction.
What are Soft Costs in Construction?
It is fairly straightforward to calculate the cost of the physical materials required for a construction project, but that's just the beginning of the total project management costs. You must also think about what is included in construction soft costs. A few examples of these are:
- Land Permits and Survey Fees - Survey and permit fees rack up quickly, particularly on a larger construction project. This includes appraisal fees, land survey fees, and the costs of necessary expenses.
- Rental Equipment Costs - It is generally more cost-effective to rent equipment necessary to complete a construction project. Purchasing that equipment outright might make sense if you’re constantly working on similar projects. However, those who only need to use the equipment ad-hoc, rent the equipment. In turn, that comes with a cost. So you must consider the equipment rental costs as part of your construction budget.
- Advertising Expenses - You’re going to have advertising expenses associated with building a reputation for your business, and spreading the word. These expenses must be rolled into the cost of a given project as well.
These are the top-of-mind things that you must think about when beginning the process of creating a budget for a given construction project. However, costs are just the tip of the iceberg when it comes to soft costs related to a construction project.
Hard vs. Soft Costs in Construction: Understanding the Divide
Along with the soft costs of a construction project, there are also hard costs that must be factored into your project budget. The hard costs often come to mind first when thinking about the overall cost of a construction project. This includes things such as labor and materials costs. These costs are more predictable and easier to plug into your budget. Meanwhile, soft costs are far more variable and can differ from project to project. Understanding the difference between the two is vital in getting an accurate budgeting structure.
Unveiling hard costs
The hard costs of a construction project are unavoidable and usually can’t be altered significantly. They include materials and labor, and any tangible costs that you’d expect with the construction of a project. There may be interior costs to the building work such as fixtures, furnishings and safety equipment. Plus, the landscaping of a building including decorative shrubbery, trees, walkways and benches. All of these things are classed as hard costs.
Why are hard costs different from soft costs?
At this stage, I hope you’re beginning to understand a little more about what are hard and softs costs in construction. The main difference is that hard costs are the direct, tangible expenses associated with the physical construction of a project. Whereas soft costs are indirect expenses necessary for project management, design and other non-construction aspects.
Examples of Soft Costs
If we dig a little deeper, we can get a better idea of what soft costs in construction look like. Plus, how they can impact a projects budget. let’s take a look.
Design: architectural and engineering fees & interior design costs
Most likely, you didn’t enter into the project or your construction budget without a plan. You probably even included the cost of that plan in your budget-check! However, sometimes additional design work comes into play, like unforeseen engineering, landscaping or interior design work. Soft costs like these can add up and blow your budget.
Permits and surveys: regulatory landscape
Regulations govern how and where construction projects can be completed. It's necessary to obtain all of the necessary permits and paperwork to set up your construction project the right way. Additionally, you must consider the costs of performing land surveys or even feasibility studies before the construction project gets off of the ground. Those surveys are worth their weight in gold because they provide essential details about the quality of the land where you are attempting to perform your construction project. Given this, don't forget to include the cost of a land survey when evaluating the costs of completing a construction project.
Environmental impact assessments
Another set of expenses that you must think about when setting up a construction project is the environmental impact of your project. To determine this, it is necessary to perform an environmental impact assessment (EIA). An EIA is a systematic process used to evaluate the potential environmental consequences of a proposed project or development. The purpose of an EIA is to identify, predict and assess the likely impacts on the environment, including natural resources, ecosystems and human well-being. This assessment provides valuable information, allowing you to make informed choices about whether to proceed with the project and, if so, how to mitigate or manage its environmental impacts.
Equipment and machinery rentals: temporary facility costs
As mentioned above, renting equipment is often a part of the construction process and can sometimes be a sneaky soft cost. So, when you're planning a construction project, don't forget to factor in the cost of renting equipment. It's pretty much a must-have for most projects. Sure, it costs money, but it's still cheaper than buying all the equipment outright. While it would be nice to own, you don't want to shell out for something you'll only use once in a blue moon.
Insurance and financial interests
Sometimes, it might be necessary to borrow funds to complete a construction project before you get paid. Borrowing money comes with interest costs. Make sure to include those borrowing costs when factoring in the cost of a construction project. Additionally, don't forget about the cost of insurance – protect your project and the health and safety of those working on it.
Project managers and consultants: accounting and administrative costs
No construction project is worth starting without guidance and stability, this usually comes in the form of project managers and consultants associated with the project. While critical to the success of a project, the labor costs can rack up for project managers and consultants. You never want to be spending more than you’ve forecast, so having project managers on board is well worth the investment.
Advertising and promotion expenses: branding and marketing campaigns
Spreading the word about what your construction company does costs money. It's necessary to think about what the cost of advertising is for any given individual project and factor that into the cost of completing that project. Advertising is a necessary expense, but it's best to try to get as much word-of-mouth advertising out there whenever possible. The more people talk about your business, the more they’ll think of you first!
Inspection and testing post-construction
Following the construction of a building, it's necessary to perform inspections on that building. Many of these requirements can differ by type of construction and locality. Inspection fees and safety testing post-construction should be added in to the budget as another soft cost.
Security and safety staff
Keeping everyone on the job site safe means hiring people who specialize in taking care of safety work. They will ensure that everyone is in keeping with the safety requirements necessary to allow everyone to work appropriately while they are on site. Also, security staff members are necessary to keep members of the public away from the area.
Legal consultations: contractual and litigation expenses
Legal concerns are something you don’t plan to have but can sometimes pop up. Protecting your business against possible claims made against it means having legal representatives that can protect your company and its interests. Those individuals and the legal work that they do are a soft cost of a construction project that must be considered.
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How to Include Soft Costs in Your Project?
There are a few steps you can take to include soft costs in your project. These include sticking to a planned budget and considering cost containment strategies, let’s have a closer look.Follow these steps below to understand how to cover soft costs in construction:
The budgeting process
Begin your construction journey by establishing a comprehensive budget that goes beyond the obvious hard costs. Be sure to include the soft costs we mentioned, like permits, fees and design services. Break down your budget into tangible and intangible elements so you can account for all potential expenditures. It isn’t a bad idea to incorporate a contingency fund into your budgeting process. Unforeseen soft costs can sneak in, and having a financial buffer ensures your project and profit margins stay on track..
Strategies for cost containment
Implementing effective strategies for containing soft costs is paramount for field service business owners. Negotiate contracts with suppliers to secure favorable terms, and explore bulk purchasing options to minimize material costs. Collaborate closely with your team to identify potential areas where soft costs can be streamlined without compromising quality.
Harness technology to your advantage. Utilize project management tools and software to track expenses, monitor timelines, and enhance communication. This not only improves efficiency but also enables real-time decision-making, ensuring that soft costs are managed proactively.
The importance of transparency
Transparency is a cornerstone in successfully incorporating soft costs. Clearly communicate the breakdown of expenses to all stakeholders involved. This not only builds trust but also allows for a collective understanding of the financial landscape. Regularly update your team and clients on any adjustments to the budget, fostering a transparent and collaborative project environment.
Don’t Let Soft Costs Beat You Down in Business
Understanding soft and hard costs is the key to budgeting like a pro in the construction world. Now you’ve got a better understanding of what percent of a construction project is soft costs, as well the difference between soft and hard costs you’ll be able to budget with ease. Soft costs? Those are the behind-the-scenes heroes – permits, fees, design services. Hard costs? Your classic materials and labor. Knowing the difference is your secret weapon. Be sure you dive into each point, set up your budgeting structure so you are set up for success.
If you’re looking for a tool that’ll help you streamline your project timelines and create estimates and quotes with accuracy, Simpro might just be the answer for you. Request a demo today.