What Are Construction Soft Costs?

Construction projects involve expenses beyond visible materials and on-site labor. These less tangible expenditures are known as soft costs. While not directly contributing to the physical structure, soft costs are an integral component of any construction budget, playing a significant role in a project’s overall viability and success. Understanding these expenses is important for anyone involved in or planning a construction endeavor, as they often represent a substantial portion of the total investment.

Understanding Soft Costs

Soft costs represent the non-physical expenses incurred throughout a construction project’s lifecycle, from initial conceptualization to post-completion activities. They can arise during the planning, design, and administrative phases, and sometimes extend into operational stages after a structure is complete. These costs are necessary for ensuring a project proceeds legally, safely, and efficiently.

The nature of soft costs often means they are variable, influenced by factors such as project complexity, location, and regulatory environments. They cover the intellectual and procedural aspects that enable a building to be designed, approved, financed, and managed. For instance, securing necessary permits and conducting various studies ensures a project complies with local regulations and environmental standards. Without these expenditures, a construction project cannot commence or operate lawfully.

Ignoring or underestimating soft costs can lead to budget overruns and project delays, impacting a development’s financial stability and timeline. Proper accounting for these indirect expenses is a foundational aspect of sound project management.

Key Categories of Soft Costs

Soft costs can be grouped into several categories, each covering specific services and fees that facilitate a construction project. These expenses are incurred at various stages and are fundamental to a project’s progression.

Design and engineering fees

These fees cover professional services to conceptualize and detail the project. They include:
Architects for overall design.
Structural engineers for stability.
MEP engineers for building systems.
Landscape architects, interior designers, and other specialized consultants.

These fees often range from 8% to 15% of the total project cost.

Permits and fees

These are governmental and municipal charges for project compliance. They include:
Building permits, granting construction permission.
Zoning applications, ensuring alignment with land use plans.
Utility connection fees for water, sewer, and electricity.
Impact fees, levied to offset the project’s impact on public infrastructure.

Legal and administrative costs

These costs cover contractual agreements, compliance, and general project oversight. Attorney fees are incurred for drafting contracts, land acquisition, and dispute resolution. Accounting fees ensure proper financial record-keeping and tax compliance. Salaries for administrative staff supporting the project also contribute to these costs.

Insurance premiums

These are expenses for policies that protect the project from various risks. Builder’s risk insurance covers damage during construction, while general liability insurance protects against third-party claims. Professional liability insurance covers design professionals against claims from their services. These policies help mitigate financial exposure from unforeseen events.

Financing costs

These costs are associated with securing and managing project funds. Loan origination fees are charged by lenders for processing construction loans. Interest payments accrue on borrowed funds throughout construction. Appraisal fees are paid to determine property value for lending. These costs can be substantial for large-scale developments.

Project management fees

These fees cover the cost of overseeing the entire construction process. This includes fees for a dedicated project manager or an owner’s representative. Their responsibilities involve coordinating teams, managing schedules, monitoring budgets, and ensuring quality control. These professionals help maintain project momentum and alignment with objectives.

Surveys and studies

These involve investigations to assess site conditions and potential impacts. They include:
Geotechnical surveys for soil conditions and foundation design.
Environmental impact assessments for regulatory compliance.
Land surveys for property boundaries and topography.
Traffic studies for local transportation networks.

These studies aid informed decision-making and risk mitigation.

Temporary utilities

Temporary utilities are expenses for services required on the construction site before permanent utilities are established. This includes costs for temporary power, water for construction activities, and waste disposal services. These utilities are necessary for daily operations.

Marketing and sales expenses

Marketing and sales expenses are incurred for speculative projects like residential or commercial developments. These costs include advertising, promotional materials, broker fees, and sales offices. While not directly building the structure, these expenses are important for realizing revenue from the completed project.

Commissioning and testing costs

Commissioning and testing costs ensure building systems are installed correctly and operate as intended. This involves verifying the proper functioning of HVAC systems, electrical installations, and other specialized equipment. These tests confirm the building is ready for occupancy and meets performance specifications.

Differentiating Soft and Hard Costs

Understanding the distinction between soft and hard costs is fundamental for accurate financial planning in construction. Hard costs are the direct expenses associated with the physical construction of a building. These include tangible materials like lumber, steel, concrete, and electrical wiring. Labor costs for on-site workers, such as masons, carpenters, and electricians, are also hard costs. Equipment rentals for machinery used directly in building, like excavators and cranes, fall into this category.

In contrast, soft costs are intangible expenses that enable the construction project but do not physically become part of the structure. While hard costs are primarily incurred during the building phase, soft costs span the entire project lifecycle, from initial planning to post-construction. For example, architectural drawings are a soft cost, while the steel beams specified are a hard cost. Hard costs are generally easier to estimate due to quantifiable materials and labor hours. Soft costs, being service-oriented, can be more variable and less predictable.

Hard costs typically constitute a larger portion of a construction budget, often ranging from 70% to 80% of the total project cost. Soft costs usually account for the remaining 20% to 30%, though this percentage can be higher for complex projects or those requiring extensive pre-construction planning.

Managing Soft Costs in a Project

Effective management of soft costs is as important as controlling hard costs for overall project success. They are often estimated as a percentage of projected hard costs, providing a preliminary budgetary allocation. Alternatively, some soft costs, such as professional fees, may be calculated as fixed fees based on the scope of services.

The variable nature of certain soft costs, like interest payments or unforeseen regulatory delays, necessitates a flexible budgeting approach. Early and accurate estimation of soft costs is important, as underestimating them can significantly impact the project budget and timeline. Project managers and owners should integrate these estimates into initial financial projections to secure adequate funding and avoid shortfalls.

Throughout the project lifecycle, careful tracking and oversight of soft expenses are important. This involves regularly reviewing invoices from consultants, monitoring permit application statuses, and tracking financing charges. Consistent monitoring helps identify potential cost overruns promptly, allowing for timely adjustments to the budget or project scope. This proactive financial management helps ensure the project remains within allocated resources and achieves its objectives.