Hard Cost vs Soft Cost – All You Need to Know

Hard Cost and Soft Cost are the terms that we generally come across in real estate or specifically in the construction industry. These two are the most widely used costs in the construction industry. Moreover, these two are the costs that always get the interest of developers and builders. Thus, it is very important to know and understand and appreciate the differences between hard cost vs soft cost.

In simple words, hard costs are the ones that are directly attributable to construction, such as material and labor costs. Such costs generally account for at least 70% of the total construction costs.

Soft costs are those costs that are not directly related to the construction, such as payment to architectural or permit charges. Such costs, on average, represent about 15% to 30% of the total cost of the project.

These two costs help in differentiating between several types of costs depending on their relations with the overall construction budget. The ratio of hard cost to soft cost varies from project to project. The more and more decorative and artistic flavor we add to the construction, the soft costs will increase as an overall percentage of the total cost.

Hard Cost vs Soft Cost – Differences

Let us discuss below the differences between hard cost vs soft cost:

Meaning

Hard costs have a direct relationship with the construction activity completion. It includes the costs that help to move construction work closer to completion. These costs mainly relate to the building’s structure, the construction site, and the landscape. On the other hand, soft costs do not directly relate to physical construction. Moreover, it does not contribute to the construction.

We can call soft costs as ancillary or associated costs as well. Another name for hard cost is brick and mortar cost.

Classification

We can further classify hard costs into general contractor costs (labor, overhead, and profit), subcontractors costs (electrical, plumbing, and HVAC), materials including shipping (structural materials, furnishings, fixtures & appliances, and more), and more heads.

Similarly, soft costs can be classified into architectural and engineering (A&E) (architect services and engineering services), AHJ fees or agency having jurisdiction (permit fees), site analysis (survey and geotechnical), financing, legal fees, administrative expenses, and more such heads. All these do help in the completion of the project, however, has no direct bearing on the basic construction cost.

Hard Cost vs Soft Cost

Project Completion

One does not incur hard costs after the completion of the project. On the other hand, one may continue to incur soft costs even after the completion of the project. For example, if a company is facing any litigation related to the project, then it may continue to incur legal and litigation fees even after the completion of construction. Similar is the situation if any regulatory compliance and approval are pending. In that case to obtain those approvals and legal compliances one needs to incur the soft costs even after the construction is over.

Calculation

It is relatively easier to calculate hard costs because a company knows how much it has actually spent on the construction. Moreover, these costs are easier to forecast as well. One can easily make a list of all the materials and equipment that one needs for the project, and get quotes for the same from the supplier.

On the other hand, it is difficult to quantify soft costs as these are not directly attributable to construction. Nor these are directly measurable. Thus, it may get hard to decide which costs to consider under soft cost. Moreover, these costs are hard to forecast as well as companies do not know if they will be incurring these costs in the future or not.

Size

Generally, hard costs account for 70% to 85% of the total construction costs. In contrast, soft costs account for just 15% to 30% of the total construction costs.

Tangible

The hard costs are usually tangible because a company needs to get assets to complete the construction. In contrast, soft costs are generally intangible, such as permit fees, architect and design fees, etc.

Examples

Some examples of hard costs are material, direct labor, raw material, and more. Some examples of soft costs are legal costs, insurance costs, set-up costs, and more.

Hard Cost vs Soft Cost – Ways to Reduce

One can mainly save on hard costs in two ways: materials and labor. To save on materials, one can use average quality items rather than buying premium quality materials. Moreover, architects can also come up with a design that makes the construction process simple and leads to saving in labor costs. Also, proper scheduling of work results in savings as it ensures there is no late shipment of materials, no idle labor, and so on.

Talking about soft cost, one way to trim it is by using superior financing. Also, by following all the rules and regulations, one can ensure that they do not face fines and penalties, as well as avoid litigation expenses, and can also avoid any work stoppage due to want of such approvals.

Hard Cost vs Soft Cost – Exceptions

Generally, it is easy to classify which costs are hard or soft. There are, however, a few costs that appear to be both hard and soft costs. These costs are:

Contingency

This cost is both hard and soft cost. When a company uses its contingency reserve to cover for materials or labor cost overruns, it becomes a hard cost. And, when a company uses the reserve to spend more on advertising, it becomes a soft cost.

FF&E

FF&E stands for fixtures, furniture, and equipment and is mainly a soft cost. But, if a company incurs money on immovable fixtures and equipment, then it is a hard cost. For example, the elevator shaft is a hard cost, but the elevator car is a soft cost.

LEED Certification

Money that a company incurs to get LEED Certification is a soft cost. But, this certification impacts the hard cost as well, such as materials and construction methods as the construction has to be in a particular fashion and specification.

Final Words

Before one even starts the construction work, it is crucial to draw a budget for the project.  A clear and detailed budget helps to smoothly carry the project. Hence, before budgeting, it is important to know the difference between soft vs hard costs. Understanding the two costs allow management to accurately classify the costs and keep them under the correct head. Such classification makes it easy to understand and forecast the costs. Since soft costs are difficult to forecast, it is better to allocate more money towards soft costs.

Help us make this article better
Share Knowledge if you liked
Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

Related Posts


Leave a Comment