Hard Costs vs Soft Costs – Commercial Real Estate Guide

Hard and soft costs are terms that appear in the construction industry, along with contingency reserve and land costs. A construction project’s total costs encompass all four types of costs. In this article, we’ll explain hard and soft costs. Specifically, we’ll examine the components of each, how to estimate and reduce them, and answer some frequently asked questions.

Video:  Hard Costs vs. Soft Costs in Construction

Hard Costs vs Soft Costs: Key Differences

Before we discuss the difference between soft costs vs hard costs, let’s define each one.

Hard Costs

Hard costs causally relate to the physical construction costs of a building or other structure. We also call them brick and mortar costs. Simply put, hard costs cover labor and materials that go directly toward the development of a property.  That is, they relate to the building’s site, structure and landscape. Typically, these costs account for about 70% to 85% of total construction costs.  Examples include:

  • Carpentry
  • Carpet
  • Concrete
  • Drywall
  • Glazing
  • Grading and paving
  • Landscaping
  • Lumber
  • Parking
  • Permits and insurance
  • Plumbing, electrical and HVAC equipment
  • Site excavation
  • Sod grass
  • Steel
  • Technology and security
  • Tools

Unsurprisingly, hard costs vary from one market to the next.  Generally, the Northeast has the highest construction costs. Unfortunately, when natural disasters occur, the availability of critical construction materials becomes scarce and prices skyrocket. Therefore, builders in vulnerable regions sometimes stock up on materials and supplies well before needed.

Soft Costs

Soft costs can represent 15% to 30% of total construction costs. These costs stem from nontangible items, including:

  • Architectural and design fees:  This includes master planning, feasibility studies, design work and similar costs.
  • Inspections:  Covers fees for inspections and permits. Also covers the costs of applying for and filing permits, including occupancy permits.
  • Land and real estate:  Includes land acquisition, legal costs, appraisals, assessments and land improvements. Also includes the costs of surveying, research, easements, rights of way, and staging areas.
  • Indirect equipment, tools and rentals:  Covers supplies, services and equipment not directly tied to project completion. Includes office trailers and equipment, communications systems, and staging area equipment. Also includes all movable equipment and furniture.
  • Loan interest and accounting:  Just about every transaction requires a fee. Also includes Interest on loans, accounting expenses, software, mortgage broker fees and commitment fees.
  • Project management:  Includes personnel costs for handling drawings and documentation, lease administration, safety and security staff, and temporary support staff.
  • Insurance and professional costs:  These include required insurance for project completion, fees for bid, performance and payment bonds, liability insurance and sub-guard policies.
  • State and local taxes:  Truthfully, agencies throughout your state might be itching to assess taxes on construction projects. Unhappily, the taxes on labor and material can mount up.
  • Advertising:  Includes marketing and public relations costs, such as collateral materials, community activities, rallies, and social media.
  • Additional Studies:  Covers extra cost estimates, traffic and geotechnical studies, surveys, professional and consultant costs, environmental impact assessments and startup fees.

Differences between Soft Costs vs Hard Costs

Beyond the definitions of hard costs vs soft costs, the differences include:

  1. Cost basis: You include all hard costs but only some soft ones in the property’s cost basis. You might roll or not roll soft costs into the cost basis. Importantly, the cost basis is critical when you sell the property, as you will face taxes on capital gains.
  2. Size: Hard costs can represent 70% to 85% of construction costs. Soft costs can represent 15% to 30% of construction costs.
  3. Duration: Soft costs can continue after the project ends.       For example, there are the costs of maintenance, security, insurance and other ongoing fees
  4. LEED Certification: This is an example involving both hard and soft costs. The certification is a soft cost, but might impact hard costs in terms of materials and techniques for construction.

How to Estimate Commercial Construction Costs

Moreover, developers must budget for construction costs, categorizing hard costs vs soft costs. This usually requires a contingency reserve of 5% to 15% or more. Because hard costs are more tangible than soft ones, budgeting for brick and mortar costs is usually easier. Clearly, one aspect of budgeting is the quality of the materials and finishes you choose. Not only do some finishes cost more than others, they could require more skill to fabricate and install. Naturally, budgeting proceeds in phases which successively increase in accuracy as you finalize plans.

Construction costs include soft costs vs hard costs

 

How to Lower Hard Costs

The two items on which you can save mortar and brick costs are materials and labor. For instance, you can reduce materials costs by substituting average quality items for higher-end ones. Frequently, architects can design in a way that eases the construction process and saves labor costs. Union labor costs more and is unavoidable in many locations and with many funding sources as well. In any event, paid workers should never have to wait for a late shipment of materials. Scheduling construction to maximize building in the summer months can help reduce winter delays. When considering hard costs vs soft costs, a little planning can go a long way to reduce costs.

How to Lower Soft Costs

One of the best ways to lower soft costs is to reduce or defer interest payments through superior financing. Contact Assets America® at 206-622-3000 to learn more about the many financing options from which you can choose. Our incredible funding sources and network of banks and private lenders will compete to get you the best deal possible for your specific situation.

Frequently Asked Questions: Hard Costs vs Soft Costs

Brick and mortar costs are hard costs. The name draws a distinction between physical locations like storefronts and virtual businesses like Amazon.com. But even Amazon has huge hard costs for warehouses, offices and other facilities. Brick and mortar costs are applicable even if the structure has neither.

It is both a hard cost and a soft cost. A contingency reserve is money you set aside in your business to handle unexpected costs. Contingent hard costs might cover cost overruns for materials or labor. You might incur contingent soft costs if you need more advertising to attract tenants.

FF&E stands for fixtures, furniture and equipment. We consider only immovable items attached to the structure to be hard costs. Therefore, FF&E is predominantly a soft cost. However, immovable fixtures and equipment are hard costs. An example is an elevator shaft. However, the elevator car is a soft cost.

Generally, this is the value of erected or installed construction during a defined period. Furthermore, it includes hard costs, soft costs, land costs and contingencies. Hard costs form the cost basis of the property and you capitalize them. However, you usually expense soft costs during the year incurred. Henceforth, that’s a major difference of hard costs vs soft costs.

What are brick and mortar costs?

Brick and mortar costs are hard costs. The name draws a distinction between physical locations like storefronts and virtual businesses like Amazon.com. But even Amazon has huge hard costs for warehouses, offices and other facilities. Brick and mortar costs are applicable even if the structure has neither.

Is contingency a hard cost?

It is both a hard cost and a soft cost. A contingency reserve is money you set aside in your business to handle unexpected costs. Contingent hard costs might cover cost overruns for materials or labor. You might incur contingent soft costs if you need more advertising to attract tenants.

Is FF&E a hard cost?

FF&E stands for fixtures, furniture and equipment. We consider only immovable items attached to the structure to be hard costs. Therefore, FF&E is predominantly a soft cost. However, immovable fixtures and equipment are hard costs. An example is an elevator shaft. However, the elevator car is a soft cost.

What is construction value?

Generally, this is the value of erected or installed construction during a defined period.  Furthermore, it includes hard costs, soft costs, land costs and contingencies.  Hard costs form the cost basis of the property and you capitalize them.  However, you usually expense soft costs during the year incurred.  Henceforth, that’s a major difference of hard costs vs soft costs.

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