What Are Soft Costs in Builders Risk Insurance?

Construction projects involve numerous expenses, broadly categorized into tangible “hard costs” and indirect “soft costs.” While hard costs relate to the physical construction of a building, soft costs represent the indirect expenses that can influence a project’s budget and timeline. Unforeseen delays or damages can lead to accumulating soft costs. These indirect expenses, though less visible than materials or labor, can have a financial impact on a project’s overall viability.

Defining Soft Costs in Construction Projects

Soft costs in construction are expenses not directly tied to physical building materials or the labor used to erect the structure. These are indirect, non-tangible costs that accrue over the duration of a project, often continuing even if physical construction is halted or delayed. Unlike hard costs, which are associated with tangible assets like lumber, concrete, steel, and direct construction wages, soft costs encompass services, fees, and other non-material expenditures. Hard costs are generally easier to estimate and constitute the majority of a project’s budget, usually around 70%.

Soft costs are often more challenging to predict and can vary based on project complexity and duration. They are incurred from the pre-planning stage through to project completion. For instance, if a project experiences a delay, soft costs like ongoing loan interest or extended administrative fees continue to accrue, adding to the overall financial burden.

Common Examples of Soft Costs in Construction

Soft costs contribute to the overall project budget but not directly to the physical structure. Professional fees, such as those for architects, engineers, and consultants, are one category. These fees may increase if redesigns are necessary due to unforeseen damage or changes during construction. Additional professional fees can also arise for specialized consultants, like environmental or interior design experts.

Financing costs are another soft cost, particularly for large-scale projects. Interest on construction loans accrues throughout the building phase, and delays can extend the payment period. Loan origination fees and other bank transaction charges also fall into this category. Property taxes are an ongoing soft cost incurred on the land and partially completed structure, regardless of construction progress.

Administrative and legal expenses include fees for obtaining and re-obtaining permits and licenses, which may be needed again if a project is delayed or requires changes. Legal and accounting fees for contract negotiations, dispute resolution, or general compliance are also soft costs.

Other examples include insurance premiums for various coverages, such as general liability and builders risk policies, which must be maintained throughout the project’s duration. Marketing and leasing expenses, particularly for commercial developments, are also soft costs, encompassing advertising, promotional activities, and broker fees aimed at attracting future tenants or buyers. Extended general conditions, which are additional overhead costs incurred by the contractor due to project delays, also qualify as soft costs.

Covering Soft Costs with Builders Risk Insurance

Builders risk insurance primarily covers direct physical damage to the structure under construction, which are hard costs. However, coverage for soft costs is typically not automatically included in a standard builders risk policy and usually requires specific endorsements, riders, or separate policy provisions. These additional coverages protect against financial losses stemming from delays caused by a covered physical loss, such as fire or vandalism.

When a covered event causes a project delay, soft cost endorsements can provide financial relief for expenses that continue to accrue or are newly incurred due to the setback. Common soft costs covered by such endorsements include extended interest on construction loans, additional architectural and engineering fees for redesigns, and re-inspection or permit fees. Coverage may also extend to extended general conditions, such as ongoing project management or administrative expenses, and loss of anticipated rental income or business profits for commercial projects that are delayed.

Soft cost coverage is generally triggered only when the underlying physical damage is caused by a peril covered by the policy. Policy limits and deductibles apply, and the specific terms defining a covered soft cost can vary between insurance providers. Reviewing the policy language carefully ensures adequate protection for these indirect project expenses.