Understanding the Difference: Soft Costs vs Hard Costs in Construction Projects

Construction projects involve various types of costs that need to be properly estimated and budgeted for. The two main categories of costs are known as "soft costs" and "hard costs". Understanding the difference between these two types of costs is crucial for construction professionals when planning a project budget and managing the overall construction process. This article will explain what exactly hard and soft costs are, provide examples of each, discuss their importance in construction projects, and highlight key differences between the two cost categories.

What Are Soft Costs in Construction?

Soft costs refer to expenses that are not directly associated with the physical construction of a project. These costs are "soft" or intangible in nature, hence the name. Soft costs in construction typically include:

• Permitting fees

• Architecture and engineering design fees 

• Project management costs

• Legal and accounting fees

• Insurance costs

• Financing fees

• Administrative and office expenses

• Commissioning costs

• Inspection fees

Essentially, soft costs include all construction project costs beyond the actual hard costs of materials and labor. While they do not directly construct anything tangible, soft costs are absolutely vital for the successful planning, design, and execution of any construction project.

Examples of Common Soft Costs

To understand soft costs better, here are some examples of typical soft costs in a construction project:

• Permitting fees – Costs associated with obtaining permits from local authorities to begin construction. This includes plan review fees.

• Architect and engineering design – Payment for designers and engineers who create plans and specifications for the project.

• Project management – The cost of hiring a project manager to oversee and coordinate the entire construction process. 

• Legal fees – Lawyer fees for construction contracts, financing agreements, settlements of construction disputes, etc.

• Accounting fees – Payment for an accountant's services related to the project's finances and budget.

• Insurance – Includes liability insurance, builder's risk insurance, performance bonds, etc. This protects against potential risks.

• Financing costs – Interest, loan fees and other costs associated with construction loans or other project financing.

• Commissioning – Testing installed equipment and systems to ensure proper functionality and operations.

• Inspections – Payment for code inspectors, special inspectors, surveyors, quality control testing, etc.

As you can see, soft costs cover a very wide range of professional services and fees that are vital to any construction undertaking. They support the actual building process.

What Are Hard Costs in Construction?

Hard costs refer to expenses that are directly associated with the physical construction of a project. Hard costs essentially cover all the material and labor costs required to build the project's tangible components according to design plans and specifications.

Typical examples of hard costs include:

• Cost of construction materials like concrete, steel, lumber, etc.

• Labor costs for site construction work like carpentry, masonry, plumbing, electrical, etc.

• Costs for heavy equipment operation and construction machinery rental

• Costs for temporary utilities, facilities, and site safety measures

• Subcontractor costs for specialty trades like mechanical, electrical, plumbing, glazing, roofing, etc.

• Sales taxes on construction materials and fixtures

• Costs of building systems like HVAC, plumbing, electrical, fire protection, etc.

Hard costs are what physically create the building from the ground up with labor and materials. They directly enable the structure to be constructed based on architectural and engineering designs.

Why Understanding Hard and Soft Costs Is Important

Construction projects involve orchestrating numerous complex and interdependent activities. Both hard and soft costs play crucial roles in ensuring projects meet objectives for safety, quality, functionality, sustainability and aesthetic appeal.

Unless both categories of costs are properly estimated and efficiently managed, overall project budgets and schedules are bound to be exceeded. Disputes, rework and cost overruns can also result.

Understanding the difference between hard and soft costs enables construction professionals to:

• More accurately estimate total project costs for budgeting

• Better coordinate activities to control costs and optimize value

• Appropriately allocate resources between hard and soft costs

• Reduce financial risks through informed contingency planning

• Effectively negotiate and manage vendor contracts

• Maintain positive cash flow by scheduling payments

Ultimately, well-managed hard and soft costs translate to overall project success and profitability for all stakeholders.

Key Differences Between Hard Costs and Soft Costs

While both categories of costs are vital for construction projects, there are several important differences between hard and soft costs:

Directly Related to Physical Construction

Hard costs are directly related to physically constructing the building. Soft costs support and enable the construction process.

Timing of Costs

Hard costs are typically incurred as construction is underway. Many soft costs like design fees come before construction start.

More Variable Soft Costs

While soft costs vary greatly based on project complexity and location, hard costs are relatively fixed per unit.

Easier to Estimate Hard Costs

There is less variability in estimating hard costs based on clearly defined project specifications. Soft costs are harder to definitively estimate upfront.

Increased Soft Cost Importance

As construction techniques become more advanced, soft costs make up an increasing proportion of total project cost.

Different Vendors

Hard costs go to specialty contractors and tradespeople. Soft costs pay for professional services like architects and lawyers.

Degree of Control

The construction team has much greater control and options for managing hard costs. Soft costs are driven more by external factors.

Allocation of Risks

Contract provisions allocate risks and responsibilities differently between hard cost and soft cost providers.

Cash Flow Patterns

Hard costs align more closely with the physical project completion percentage. Soft costs are front loaded. 

In summary, while hard and soft costs have distinct differences, they both require diligent management focus for successful project delivery. Understanding their unique attributes is key.

Key Takeaways on Hard and Soft Construction Costs

Understanding the difference between hard and soft costs is essential knowledge for all construction professionals involved in planning, budgeting and managing projects. Here are some key takeaways to remember:

• Hard costs directly construct or produce the physical building while soft costs enable and support the process.

• Careful upfront estimating of both cost types is crucial for accurate budgets and cost control.

• Soft costs often represent the largest share of total project cost and require diligent management.

• Hard costs align closely with project completion percentages while soft costs are front loaded.

• Cost overruns and disputes can be reduced through clear contractor agreements on hard versus soft cost responsibilities.

• While hard costs may have more variability, soft costs often pose greater financial and organizational risks.

• Construction productivity improvements rely heavily on managing soft costs like efficient project coordination and lean processes.

• The allocation of resources between hard and soft costs should align with overall project objectives and constraints.

• Minimizing soft costs where possible provides more budget for optimizing the hard construction costs.

Both hard and soft construction costs are integral for achieving project success. Understanding their key characteristics and differences enables more effective cost planning and control. With meticulous management of hard and soft costs, construction projects can meet stakeholder objectives and create value efficiently.