What is a Soft Cost in Construction and Why It Matters?

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What is a soft cost in construction?

When you think of building a house, a school, or even a shopping mall, you include the workers, machines, and materials that bring the project to life. These are the visible parts of construction, often called “hard costs.” But there’s another side to construction that’s just as important: soft cost.

Soft costs are the expenses that don’t directly involve bricks, concrete, or machines. Instead, they cover things like hiring architects to design the building, paying for permits to get government approval, or buying insurance to protect the project. These costs might not be as obvious as the materials or labor, but they’re essential to making sure the construction project runs smoothly from start to finish.

In this blog, we’ll uncover everything you need to know about soft costs in construction. We’ll define what they are, explain their types, and show why they’re so important. You’ll also learn how to estimate these costs accurately and manage them to keep your project on track.

KEY Takeaways

What is a Soft Cost in Construction?

Soft costs are the expenses that don’t involve the physical building process. It deals with everything needed to support the project before, during, and after construction. These costs focus on planning, organizing, and handling the project, as well as ensuring legal and safety requirements are met.

Before construction even begins, you’ll require an architect to design the building. You will also have to pay for permits that allow the project to move forward legally. These are soft costs. During the project, you might need project managers to oversee progress or insurance to protect the workers and the site. All of these are soft costs, and they are as necessary as laying the foundation or installing windows.

Hard cost is a tangible entity and learn here to know the difference between hard and soft cost.

Common Examples of Soft Costs

Let’s look at the main types of soft costs and what they contain.

Design and Engineering Fees

Staring anything requires a plan. Architects and engineers work to design the structure, creating detailed maps and technical drawings. Designers also help make spaces look appealing and functional. Paying these professionals is a major part of soft costs, as their work assures the project is safe, efficient, and up to code.

Permits and Legal Fees

You can’t just start building without getting permission. Construction projects must follow local laws and regulations, and you need permits to prove that everything is approved. These permits cover things like safety standards, zoning rules, and environmental impact. Legal fees may also demand hiring lawyers to handle contracts or resolve any disputes.

Financing Costs

If you take out a loan to pay for the project, you will have to deal with financing costs. These contain the interest on the loan, fees for starting the loan (called origination fees), and any charges for managing the funds. Without proper financing, it can be tough to keep the project moving forward.

Insurance

Every construction site comes with risks, like accidents or weather damage. Insurance is a must for everyone’s protection, including builder’s risk insurance and liability insurance. Both are safeguarding the site’s damage and lawsuits. Workers’ compensation insurance is also crucial to support injured workers.

Project Management Fees

Big construction projects need someone to keep everything organized. Project managers confirm that tasks are done on time, budgets are followed, and resources are used wisely. Their work helps prevent delays and keeps everyone on the same page, making their fees a crucial soft cost.

Marketing and Sales Expenses

Once the building is complete, you might go to advertise it or prepare it for sale or lease. Marketing costs comprise creating advertisements, running campaigns, or hosting open houses. These expenses are especially important for commercial properties like office spaces or apartment buildings.

Read more on market planning for construction companies.

Post-Construction Costs

Even after the building is finished, soft costs don’t stop. You do spend money on landscaping, repairs, or ongoing maintenance. Additional property taxes or legal fees can also arise once the building is operational. These post-construction costs guarantee that the project remains functional and appealing.

Why are Soft Costs Important in Construction Budgeting?

These costs play a big role in the overall budget and can determine whether a project runs smoothly or faces serious problems.

Soft costs often make up a significant part of a construction budget, typically ranging from 25% to 75%. For example, in smaller projects like building a house, soft costs might be closer to the lower end of that range. In larger, more complex projects, like constructing a hospital or an office building, soft costs can rise sharply because of the need for detailed planning, legal compliance, and skilled professionals. Ignoring these costs or underestimating them can cause big trouble later.

One major risk of underestimating soft costs is running out of money before the project is finished. The project could get delayed or even stopped completely. Failing to budget for insurance might leave you unprotected if something goes wrong, leading to unexpected expenses that could hurt your finances.

Accurate budgeting for soft costs gives the idea that you can cover every part of the project, not just the materials and labor. It assists you avoid surprises and keeps the project on track from start to finish. Soft costs may not be as exciting as watching a building rise, but they are the foundation of a well-planned, successful construction project.

How to Calculate Soft Costs

Estimating soft costs in construction is like making sure you have all the right tools before starting a project. If you miss even one important detail, it can throw everything off balance.

Here are some steps to help you estimate soft costs correctly and avoid surprises later.

1. Identification of All Soft Costs

The first step is to add every part of the project that doesn’t contain physical construction but still costs money. This part covers design fees, permits, insurance, and project management expenses. Break the project into phases: planning, construction, and post-construction, and list the costs for each. A thorough checklist can aid you in catching things you might otherwise overlook.

2. Leveraging Technology

Technology can also make estimating soft costs easier. Many builders use construction management software to track budgets and calculate costs. These tools help you organize your expenses, compare them to similar projects, and spot anything you might have missed. By using software, you can also update your budget in real time if changes happen during the project.

3. Consultation with Professionals

Consulting an experienced team is another important step. Architects, engineers, and project managers have seen it all and can give you a realistic idea of what your project might cost. They understand the small details, like how much to budget for permits or the best insurance options. Their expertise can save you time and money while improving the accuracy of your estimates.

4. Utilize Historical Data

Lastly, historical data is a valuable resource. If you or your team have worked on similar projects in the past, use those records to guide your budgeting. Look at how much was spent on soft costs and compare those numbers to your current project. Patterns in costs, like design fees or legal expenses, can help you predict what to expect.

Strategies for Managing and Reducing Soft Costs

There are ways to handle them effectively and even reduce their impact without cutting corners.

Start with good planning and early budgeting. When you create a budget at the very beginning, you can map out every soft cost and set limits for each category. For example, you can decide how much to spend on design fees, permits, and insurance before construction starts. By planning early, you can avoid last-minute decisions that often lead to higher expenses.

Negotiating with vendors and service providers is another powerful way to lower soft costs. Architects, engineers, and other professionals might be willing to adjust their fees if you can explain your budget requirements. You can also compare prices from multiple providers to find the best deal. Just like shopping around for a phone or a car, getting quotes from different vendors helps you avoid overpaying.

During the project, keep track of your expenses through regular financial reviews and audits. This means checking your budget often and comparing it to the actual costs. If you notice that one area, like legal fees, is higher than expected, you can adjust other parts of the budget to stay on track. Audits also assist you in detecting mistakes early so you don’t end up spending more than necessary.

Finally, invest in efficient project management tools. Software designed for construction projects can help you monitor spending, set reminders for important deadlines, and organize contracts and invoices. These tools save time and decrease human errors. A good project management system is like a guide that keeps your project running smoothly and efficiently.

Discover resources on smarter budgeting methods.

Conclusion

Soft costs in construction are intangible, but they are vital for any project’s success. From the start to the last phase, these costs check that everything runs smoothly, legally, and efficiently. Ignoring or underestimating them can lead to budget overruns, delays, and even project failure. You can avoid unnecessary stress, stay within your budget, and ensure that your project meets its goals on time.

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