A construction project involves way too many variables. For this reason, it is a challenge to forecast an accurate budget. From the fluctuating prices of materials to labor costs, contractors are often at a loss in calculating the project’s cost. But this does not mean it is impossible – you can find the exact budget by considering hard and soft costs.

Having decades of experience as a construction business CPA in San Francisco, I have realized the difference between hard and soft costs will also control your project expenses.

Below, I will shed light on the comprehensive overview of hard costs and soft costs in construction projects. Highlighting the differences will offer insight into the cost estimate and budget.

Understanding hard costs in building

Also known as core or tangible expenses, hard costs are labor, equipment, and supplies. The costs usually take up around 70% of the project. So, you should start calculating the hard costs from the beginning of the construction phase till the completion of the construction phase. You can expect the hard costs to be fixed only, and the cost changes if the project requirements change.

Let’s have a look at what goes into the hard costs:

• Labor costs (wages for construction workers)
• Material costs (for steel, insulation, concrete, wood, and glass)
• HVAC system and installation costs (for heating, ventilation, and air condition systems)
• Safety systems (such as fire alarm systems, security systems, auto fire sprinkler systems)
• Interior and exterior finishing touches

Factors for hard costs

Two crucial factors to keep in mind are geographical location and supply chain and market dynamics. In colder regions, you might face higher costs, especially for roofing systems designed to withstand extreme cold and heavy snowfall.

In addition, fluctuations in the supply chain have become common because of inflation. This is one of the reasons affecting material and labor costs. For instance, the price of steel went up during the pandemic, and it remains so till today.

Understanding soft costs in construction

Often referred to as overhead expenses, soft expenses are intangible and not directly linked to the physical construction project. Soft costs involve local regulations and loan interest rates.

Let’s have a look at the soft costs of building:

• Financing costs and interest payments
• Legal and accounting fees
• Environmental and sustainability evaluation
• Marketing costs for promotion
• Taxes and governmental fees
• Land costs and interest rates

Some contractors overlook soft costs because they are intangible. Planning and research will help you estimate way before the construction starts.

The difference between hard costs and soft costs

Though it seems easy to calculate hard costs, you should not overlook hard costs. The key difference between soft and hard costs is that the latter is linked to the physical construction, and the former is not. Hard and soft costs may take place at different times and have varying levels of impact on the profit.

So, hard costs are parallel with the construction work. However, soft costs start at the beginning of the construction and may continue till the exit of the investment.

Final Thoughts

When calculating the construction budget, you can always consult a construction advisor with similar experience, and use a reliable estimating software and tools. Usually, hard costs vary between 70%-80% of the whole construction costs and soft costs somewhere between 15%-30% of the construction expenses.