Here’s a word that causes headaches: budget!
When it comes down to it, construction projects are defined by their budget: costs, cash flow, payments, invoices, and more. Estimating is tricky, and the last thing you need is a blind spot like a soft cost. As project managers, general contractors, and subcontractors know, it doesn’t take much to tip a budget over the edge.
‘Soft costs’ are an important industry term, but what does soft costs in construction mean?
What are Soft Costs?
You know when you give an estimate for something, and the customer says, ‘but it only costs this much for the materials’? You know the costs are more than simple labor hours and materials, but people often focus on the obvious, upfront costs of budgeting. This is why margins are built into estimates and job costing as the ‘price of doing business.’
Soft costs are challenging to see. Project planning focuses on the physical result of construction, so it can be easy to focus on the direct needs to build something rather than indirect needs. The influence of soft costs in construction can’t be overlooked. It’s like when someone’s having engine trouble, and it turns out they’ve never changed their oil. It’s significant but easy enough to forget to account for. And just like engine oil, soft costs run through all the working parts of a construction project!
So, what are soft costs in construction, and how do we account for them? An excellent way to explain the concept of soft costs in construction is to compare them to their counterpart: hard costs.
Hard Costs
Hard costs in construction are directly related to a project's completion. These are tangible things such as materials, labor, and landscaping. They’re easier to estimate, as they have definite costs that can be calculated and can have risk built into their budget.
Hard costs also benefit from having a limit: because they’re tangible goods and services, there comes a point in the project where the costs end. For example, subcontractors require a certain amount of hours to complete their work; It’s a reasonable estimation, and once they’re done, they’re done. Their invoice can be approved and paid. A project requires only so much concrete, wiring, and rebar; it’s not being bought to see how high the pile can get.
After each hard cost has been accounted for, it usually has a final number to put down on the budget. The percentage of hard costs of total construction costs is typically 70% up to 85%.
Soft Costs
In accounting and budget talks, soft costs in construction are often known as ‘overhead.’ But that term doesn’t tell you much about them either; they’re just costs in addition to everything else.
Compared to hard costs, soft costs in construction are indirectly related to a project’s completion and success. They’re often not directly tangible like hard costs but are still necessary for everything to work. Some hard costs, for example, change depending on the project. Soft costs, like fees, permits, safety, and marketing, can be challenging to account for and predict each project's needs.
Soft costs in construction are often managed apart from the hard costs. They’re harder to estimate, as each project will have a unique combination of potential soft costs.
Preconstruction is the critical time to identify soft costs and prepare room in the budget. They typically run between 15% to 30% of the budget, but it’s important to remember that soft costs will run through the entire project, from preconstruction to post-construction. They can start at 30% but end up being 50% of the cost or more.
This price fluctuation is why preparing and identifying potential soft costs in construction is necessary!
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11 Soft Costs in Construction
A key takeaway is that all these costs are essential to project completion and must be accounted for in the budget. Hard costs will be straightforward to quantify and easier to estimate, and soft costs will be trickier. But not to worry! These costs can be accounted for with the proper preparation!
The best way to get your head around soft costs in construction is to break it down.
1. Equipment Rentals: Tools of the Trade
Equipment rentals are a great example of hard costs vs soft costs in construction. Construction equipment directly related to the project is a hard cost, such as cranes, scissor lifts, excavators, etc.
However, plenty of equipment rentals aren’t directly a part of completing a project, which is still vital to its success. It’s usually more cost-effective to rent equipment rather than outright purchase, but this depends on your business trajectory and what kind of projects you’re a part of.
These rentals include:
- Safety/Security Fencing
- On-site offices and office equipment
- Porta-potties
- Radios and communication equipment
- Lighting and staging area equipment
2. Real Estate and Land Costs
Now, you might think: ‘Isn’t land a direct, tangible cost?’ While it is, and the land has a price tag, it’s not directly related to the completion of a construction project. Preparing the land for construction is a hard cost, but the land itself is technically a soft cost.
Real estate and land costs don’t stop there! Other costs include:
- Legal Fees
- Geotechnical Studies
- Land Surveys/Tests
- Appraisal Fees
- Land for staging areas
3. The Regulatory Roadmap of Permits and Surveys
The appropriate permits must be sought and approved before a construction project can get off the ground. Each project is different, and various permits will be required depending on the location and type of construction.
Surveys are vital to the success of a construction project. Land surveys and feasibility studies will determine if the site is appropriate for construction. Detailed surveys provide a wealth of information and are an investment in the future of a project.
This is the step that takes the project from paper to reality!
4. Advertising and Marketing Investments to Craft Visibility
It’s one thing to put together a fantastic project, plan the construction, and secure the loans and land required, but what if no one knows about it? Many projects will require interested buyers, and advertising/marketing soft costs in construction are vital to get in the black.
If the project intends to sell or lease the final product, these soft costs are essential to getting your construction project out there and visible to the community. It is also essential to recruit potential employees if necessary.
Costs can include:
- An up-to-date website with project progression and projected completion dates
- Social media campaign and team
- Signage, banners, and flyers with the project name and start/sale dates
- Community events and sponsorships
Keep the information in advertising accurate, and make sure to include contact details. If there are no concrete dates yet, that’s okay!
5. Tax and Insurance Implications
One of the things you can count on in any budget is tax. Each level of purchase, service, and sale brings its own tax implications.
Local tax, land tax, and material/labor tax all have their own rules and specifics. Complex projects need to have tax professionals who can oversee the requirements. The cost of a consultant may add up, but it’s preferable to noncompliance with taxation!
Insurance is another vital soft cost, and projects require particular insurance before beginning.
Protect your project and workers with the right insurance. Professional liability insurance is a must: we all make mistakes, no matter the level of experience and skill. It’s like keeping your hard hat on; maybe it’ll go without a scratch, but you want it there just in case of a falling brick.
6. Security and Safety Costs
The last thing you want on an active work site is an accident or injury, especially a preventable one!
It’s essential to have dedicated safety staff to ensure the job site meets safety regulations and everyone complies with safety requirements. As subcontractors and teams can join projects at different times, safety staff can ensure everyone is up-to-date with relevant safety procedures and training.
Security staff and equipment are also necessary to protect both the job site and members of the public. These soft costs can be expensive, but they are essential to protect the project from delays and fulfill legal requirements.
7. Architectural and Design Fees
These soft costs include everyone under a construction project's design, engineering, and feasibility. This consists of the architect and design team, engineers, and subcontractors assessing and designing the functional elements of a project. It’s one thing to have the blueprints drawn up and another to see how they translate into reality.
The design takes time! The preconstruction stage is where the importance of soft costs shines, as the time taken to plan and prepare can determine the overall success of a project.
These soft costs can account for up to 10% of a budget, a significant amount! It’s money well-spent, however, as proper design can mitigate many risks associated with construction projects.
8. Inspection Expenses
Ongoing inspections during construction projects might be a pain for everyone, but they’re indispensable to ensure that your project is on the right track. Transparency about the progress of construction and the quality of work is vital to prevent problems down the line. It might be frustrating to go back over something to fix it or bring it up to scratch, but a pinch of prevention is worth a pound of cure.
For example, issues with building foundations or site preparation that aren’t noticed can have disastrous effects down the line, or things like incorrect wiring and plumbing can be an absolute headache. Mistakes happen; sometimes, it takes a fresh set of eyes to notice.
This soft cost in construction will run through the entirety of the project and after completion.
9. Loan and Accounting Outlays
Keeping all the numbers in the right place is essential to ensure your project succeeds. Construction projects, especially more extensive projects, will require an accountant or accounting team to ensure expenses are covered, invoices are paid, and every dollar is accounted for. Accounting is a soft cost as it isn’t a direct part of a construction project, but it is still necessary.
Other costs include accounting software, bank transaction fees, mortgage broker fees, and loan fees.
Speaking of loans, if they are taken out to cover construction costs, they will have interest payments that need to be covered.
Keeping track of loan payments is essential to avoid late fees and ensure smooth sailing. This is another area where a dedicated accountant will shine! The account team must also work closely with the next soft cost:
10. Project Management Expenditures
The project manager! Soft costs in construction need to cover the owner’s representatives: project managers or firms that oversee the project to ensure it stays on schedule and (hopefully) within budget.
This cost also covers staff needed to maintain and track documentation and other administrative duties. The larger the project, the larger the team will need to be. It can be a significant cost, but the project would only fall apart with it.
11. Post-Project Expenditures
Finally, there are post-construction costs.
These fall under soft costs in construction as the project itself is completed, but there are still ongoing budget needs to ensure overall success and financial viability. By this point, hard costs are done, and this is where budgets can get tripped up.
These costs can include:
- Legal Fees
- Repair and Maintenance
- Building Management Fees
- Additional Landscaping
- Testing and Inspections
- Sales/Leasing Fees
Soft Costs Best Practice
As you can see, there are many soft costs in construction and many areas where a budget can balloon. To keep on top of soft costs in construction, you need to be able to see how the project is tracking, if costs are on target, and spot potential risks.
We have a few tips to reduce soft costs in construction without jeopardizing your project.
Make the Most of Technology
Fortunately, technology provides many of these services in one easy place. Communication breakdown is a significant issue in complex construction projects, but now we can be in contact from anywhere!
Project management software provides a place where everyone involved in a construction project can access the same documents, schedules, and information.
Accurate and On-Demand Time Tracking
Digital timesheets are a great example of how software can streamline a time-consuming process into a straightforward one. With time-tracking software, you can see hours and team productivity and even use the data to forecast future costs. This can secure and streamline payroll in one place to avoid inaccurate hours and manual entry mistakes.
Transparency is Key
Transparency of documentation and reporting is a crucial part of staying within budget. This is where inspectors, surveyors, and contractors contribute to success by ensuring project information is current and accurate.
Documentation, software, and digital reporting are your friends. Access to reporting from anywhere on the job site means workers at every level can get what they need and document their progress.
ClockShark: Your Soft Cost Ally
Skimping or cutting corners on soft costs in construction isn’t the answer, but plenty of things can streamline your processes and ensure all your information is in the right place.
ClockShark offers a suite of tools to make time tracking, invoices, and scheduling a breeze, all in one easy app. ClockShark goes with you into the field, so no matter where you are or what you need, we’re there!
