Quick look sheet:
|Expenses tied to materials, labor, equipment, and physical construction on-site.
|Expenses not directly related to on-site construction activities, including services, fees, and overhead.
|Mainly during the construction phase.
|Can occur pre-construction, during construction, and post-construction.
|Fairly accurately estimated based on project specifications.
|Harder to definitively quantify upfront.
|Proportion of Total Costs
|Typically 50-80% of total project costs.
|Usually 15-30% of total project costs.
|Remain more stable once set.
|Can vary significantly (e.g., financing rates).
|Paid as project milestones complete.
|Disbursed steadily over the project timeline.
Hard costs in construction and renovation refer to tangible expenses directly linked to the physical construction, including materials, labor, equipment, and permit. These costs are quantifiable and relatively easy to estimate.
Soft costs, on the other hand, are expenses that are essential for the successful completion of a project but are not directly tied to the physical construction of the building or structure. Examples of soft costs include architectural and engineering fees, financing costs, insurance, and legal fees. Soft costs are more challenging to forecast as they occur throughout the project, from pre-construction to post-construction.
Construction projects involve a complex web of expenses. To properly budget and manage costs, construction firms must understand the difference between hard costs and soft costs. Though the terms may sound ambiguous, there are clear distinctions between these two categories.
In this comprehensive guide, we'll cover everything you need to know about classifying, estimating, and controlling hard and soft costs in construction. With insight into these foundational budget elements, you can pursue and deliver projects more profitably.
What Are Hard Costs in Construction?
Hard costs refer to expenses directly tied to the materials, labor, and equipment required to physically construct a project. In essence, hard costs are the tangible, on-site assembly costs needed to erect a structure.
According to the Construction Management Association of America (CMAA), hard costs typically comprise 55-65% of total project costs. Since they entail physical items, hard costs are relatively straightforward to estimate based on project specifications.
Accurately projecting hard costs is crucial because underestimating them is one of the biggest reasons for cost overruns in construction.
Common hard costs in construction projects include:
All building materials purchased and installed on site like lumber, concrete, windows, finishes, and more. Materials usually make up 30-45% of total hard costs. Proper materials management ensures required items arrive when needed.
Wages paid to contractors and construction workers who handle the physical on-site building work. Carpenter, plumber, and electrician pay typically comprises 40-50% of hard costs. Having skilled workers is key to avoiding project delays.
Expenses for renting cranes, excavators, bulldozers and any equipment used on the jobsite during construction. The cost of equipment depends on the type of project.
Earth-moving, trenching, land clearing and utilities installation required to prepare the site. According to Cumming Construction Management, site work averages 5-10% of total construction costs. More info: Guide to Commercial Site Work Costs.
Supplying and planting trees, shrubs, bushes, flowers, sod, etc. to beautify the property grounds. Landscaping can cost $15,000 to $50,000 on average for a single-family home.
As we can see, hard costs directly enable physical construction. Tracking them accurately is thus crucial for avoiding budget pitfalls.
Hard costs occur primarily during the actual construction phase, with early expenses for materials delivery and contractor mobilization. Since they entail physical items and labor, hard costs are relatively straightforward to estimate based on project specs.
What Are Soft Costs in Construction?
Soft costs refer to project expenses not directly tied to on-site construction activities. Soft costs generally relate to services, fees, insurance, financing, taxes, and associated overhead. Common soft costs include:
Preconstruction Soft Costs
- Architectural and engineering fees: Paying designers, engineers, consultants to plan and spec the project.
- Legal fees: Lawyers required for property acquisition, permitting, contracts, and financing compliance.
- Surveying fees: For surveying the site property lines, topography, easements, etc.
- Permits and inspections: All payments for permits, licenses, plan checks, and inspections.
- Land acquisition: Buying or leasing the construction site if not already owned.
Construction Soft Costs
- Project management and admin: Office trailer rental, admin staff, security, consultants.
- Insurance and taxes: Builders risk, liability, workers comp premiums + property taxes.
- Financing costs: Loan interest, lending fees like origination and appraisal fees. More loan info: How To Get Financing For Major Home Improvements
- Contingency funds: reserves set aside for unexpected overages. Usually 5-10% of hard costs.
Post Construction Soft Costs
- Marketing and leasing: Advertising, signage, brokerage commissions for selling or leasing the property.
- Maintenance and utilities: Keeping the asset operational until occupied.
- Accounting and legal: Finalizing all construction accounts and contracts after completion.
Since soft costs relate to services and operational overhead, they can arise early in planning, continue through construction, and occur for months after project completion. This makes soft costs difficult to definitively estimate upfront.
However, they comprise 15-30% of total costs, so must be budgeted for as best as possible. Neglecting soft costs is a huge mistake that causes financial hardship down the road. Overall, you need to control your construction by a list.
Key Differences Between Hard and Soft Costs
While hard and soft costs combine to give the total expense for construction projects, they have some distinct differences:
- Tangibility: Hard costs relate to tangible, physical materials while soft costs are intangible services and fees.
- Timing: Hard costs mainly occur during the construction phase. Soft costs can arise pre-construction, during construction, and post construction.
- Predictability: Hard costs can be fairly accurately estimated based on specs. Soft costs are harder to definitively quantify upfront.
- Proportionality: On most projects, hard costs comprise 50-80% of total costs while soft costs are 15-30%.
- Volatility: Hard costs remain more stable once set, while soft costs can vary significantly (eg. financing rates).
- Drawdown: Hard costs get paid as project milestones complete. Soft costs disburse steadily over the project timeline.
Why Understanding Hard and Soft Costs Is Critical
Keeping hard and soft costs distinctly budgeted has some major advantages for construction firms:
- Complete cost view: Adding hard and soft costs gives the full project expense instead of just direct building costs.
- Accurate budgets: Granular cost data allows budgets to be realistic by avoiding underrepresentation of soft costs.
- Better change monitoring: Cost overruns related to either hard or soft costs can be quickly identified.
- Improved cost control: When all costs are visible, measures can be taken to control hard and soft costs increases.
- Enhanced reporting: Reports can show spending on schedule, labor, materials, fees etc. separately.
- Informed decisions: Change orders can be approved based on exact budget impact to hard vs soft costs.
For these reasons, keeping hard and soft costs separated is a best practice in construction budgeting and cost management.
Common Reasons for Cost Overruns in Construction Projects
While a well-planned budget accounts for all anticipated expenses, projects often exceed their budgets. Some common reasons for cost overruns in construction include:
Mistakes in estimating either hard or soft costs during budgeting results in insufficient funds when expenses turn out higher. Common estimating problems include:
- Incomplete project details and scope definition.
- Insufficient cost data on materials, labor, and services.
- Using estimating techniques that lack sufficient accuracy.
- Making unreasonable assumptions on costs, schedules, productivity.
- Estimating without adequate expertise in specialized trades.
Design changes to the project's specifications that occur after budgeting often entail significant extra costs. Value engineering during design and establishing proper change control is key to avoid scope increases.
Projects delayed longer than scheduled inflate budgets. Labor costs rise due to extended work. Material escalation increases supply costs. And extended overhead for equipment, trailers, etc. add up.
Having to repeat work due to errors or changes adds labor, material, and time costs. Ensuring competent project teams and avoiding excessive changes reduces rework.
Material Price Escalation
Prices of construction materials fluctuating higher than expected blows budgets. Being aware of market cost trends and locking in material prices help hedge volatility.
New regulations issued mid-project that force changes or rework to remain compliant add big costs. Keeping abreast of upcoming regulations is key.
Poor Change Management
Letting changes occur without proper tracking, assessment, and approvals leads to uncontrolled creep in costs. A disciplined change management process is critical.
When contractors work inefficiently or make mistakes requiring rework, costs escalate. Thoroughly vetting contractors and overseeing their work is vital.
With various factors causing overruns, maintaining project budgets requires diligence across all stages of construction.
Tips for Accurately Estimating Hard and Soft Costs
Careful estimation of hard and soft costs helps projects stick to their budgets. Here are some tips for estimating hard vs soft costs:
- Start with a detailed project scope and requirements - An accurate budget begins with comprehensive details of the design, specifications, and expectations.
- Involve experts for estimations - Seek input from architects, engineers, contractors etc. on hard costs. Get financing and legal counsel for soft costs.
- Use historical data from similar projects - Referencing archived cost data from past comparable projects provides realistic starting estimates.
- Break down costs into line items - Granular division of hard and soft costs into individual components improves estimate accuracy.
- Allocate appropriate design and estimating time - Sufficient time should be provided in the schedule for detailed design, estimating, and budgeting pre-construction.
- Buffer with contingency reserves - Allocate contingency funds amounting to 5-10% of total budget to absorb hard and soft cost overruns.
- Plan early procurement of long-lead items - Ordering key material and locking in prices early hedges against escalation.
- Phase larger projects - On large projects, phasing work allows hard costs to be refined over multiple stages as completed phases provide cost data for remaining ones.
- Use historical metrics to estimate productivity - Look at completed comparable projects to realistically estimate labor costs based on actual field productivity.
- Update estimates through procurement - As the project progresses, costs become more certain. Continue refining estimates with new information.
- Track costs diligently - Monitor all hard and soft costs against the budget to identify any deviations requiring intervention.
- Maintain contingency reserves - Replenish contingency funds as they get used to ensure adequate buffers until project completion.
- Consider life cycle costs - To determine total cost of ownership, factor maintenance, operation, utility costs during estimation.
- Protect you floor - Choose a durable temporary floor protection is the most important thing!
With careful pre-construction estimating, consistent tracking during construction, and drawing on past data, projects can develop, monitor, and control accurate budgets.
The Importance of Contingency Funds
Contingency funds are amounts allocated in the budget to cover unexpected costs. Here are some key points about construction contingency:
- Contingency provides financial breathing room for absorbing unforeseen expenses.
- It is usually calculated as 5-10% of estimated hard costs. Higher for complex projects.
- Contingency gives flexibility to deal with surprises and delays efficiently.
- Tracking contingency drawdowns indicates available buffer as the project progresses.
- Maintaining contingency funds until project completion provides continued risk mitigation.
- Adequate contingency helps avoid project delays or cost overruns.
- Smart contingency use demonstrates prudent project financial management.
In summary, provisioning contingency funds in budgets is vital for insulating projects from surprises that exceed cost estimates.
Conclusion: Hard vs Soft Costs in Construction
Construction budgets consist of two primary components - hard costs for materials, equipment, and labor and soft costs for associated services, fees, and overhead expenses.
While hard costs occur mainly during construction, soft costs arise pre-construction, during construction, and post-construction. Hard costs also tend to be more predictable than soft costs.
However, both hard and soft costs must be diligently estimated and tracked to maintain accurate project budgets. Granular breakdown of costs enables better monitoring, reporting, control, and decision-making.
Avoiding common pitfalls like poor estimating, uncontrolled changes, delays, and lack of data helps contain construction costs. Proper classification and management of hard vs soft costs makes projects smoother and more profitable.
By mastering the nuances between these two deceptively simple facets of construction budgets, firms can drive significant gains in their financial and operational performance.