As we’re kicking off a new project, walking through budget concepts and scenarios is often part of our conversations with our clients. Understanding the two primary categories of expenses, hard costs and soft costs, is important for managing budgets effectively and avoiding financial conflicts or surprises.
Hard costs are the tangible expenses tied directly to the construction process. They include materials, labor, and equipment. These costs represent the physical components that bring a building to life.
Soft costs, in contrast, are intangible. They include the services, planning, and legal processes required to make the project happen. They are not the physical structure, but are unavoidable and just as important to budget for.
By understanding these two categories, architects, project managers, contractors, and clients can work together to keep track of budgets and timelines. Let’s explore these costs in detail.
What Are Hard Costs in Construction?
Hard costs are the direct expenses associated with creating the physical structure of a project. They include everything from raw materials to the labor required to assemble them. These costs are easy to quantify because they involve tangible items and services. Let’s break down the primary things that make up your hard costs.
Materials
Materials make up a significant portion of the hard costs. These include items like concrete, steel, wood, insulation, plumbing fixtures, and electrical wiring. Some materials are specified by your architect or designer. These include much of what you can see: paints, stains, flooring, roofing, siding, and so on. They will be presenting these to you for approval throughout the process, often with input from your contractor, specifically regarding pricing and budget as you get into the final phases of the design process. The other materials are chosen by your contractor and their sub-contractors. These are all of the standard materials behind the scenes they use to build: lumber, concrete, wiring, pipes, building wrap. Unless specifically noted by your architect, they will use what’s available from their suppliers and what they can get the best price on.
This distinction is important to understand as you plan your project. If you are looking to use higher-quality materials, (an example of this is that we encourage our clients to use true plywood for wall, roof and floor sheathing instead of OSB particleboard. It is more durable, more resistant to mold and rot, and has less glue therefore less concern of offgassing) this needs to be made clear early on, so your contractor can adjust their price accordingly.
It’s worth noting that these costs can change over the course of the design process. Often we go through a preliminary pricing exercise in the early phases of a design, to make sure the concept aligns with your goals and budget. But the design and permitting process takes time. Sometimes over a year. Prices can change. Availability can change. Taxes, tariffs, shipping costs, supply and demand, and so on, can all affect your initial estimates. These realities aren’t ideal and are hard to plan for.
Estimation of material costs is done several times during the planning phase. Miscalculations or unforeseen price changes can derail your project or delay timelines while the design or selections are updated, but it’s better to go through the pricing exercise, with increased detail, at each design milestone, and know where you stand, than to get to bidding and negotiations and require a major redesign.
Labor
Labor is another key part of your hard costs. This includes wages and benefits for the workforce responsible for construction. Labor costs vary quite a bit from one place to the next.
Specialized labor, such as electricians, plumbers, and HVAC technicians, often comes at a premium. Craftsmanship in any trade comes with its price, but is part of any legacy project. You get what you pay for, to a significant extent.
Labor costs can escalate quickly if delays or changes occur. Organization and planning are some of your contractor’s top priorities. Clear contracts and effective communication are established to prevent misunderstandings or disputes.
Equipment
Equipment costs include the machinery and tools necessary for construction. This may involve purchasing, leasing, or renting items like bulldozers, cranes, excavators, and scaffolding. Smaller tools, such as drills and saws, also fall under this category.
These costs are generally factored in to your contractor’s overall pricing and it isn’t your concern. Sometimes specialty equipment is needed and you will see it as a separate line item.
Any disorganization or changes that cause delays can become issues that affect your budget. If equipment or labor shows up and the site isn’t ready, or there are changes midway that cause people or equipment to be sitting around, it can become more expensive pretty quickly.
What Are Soft Costs in Construction?
Soft costs are the indirect expenses that support the overall success of a construction project. These costs occur before, during, and after construction and include services, permits, and other non-physical aspects. Though less visible than hard costs, soft costs are equally important. Here’s a detailed look at the key components.
Design and Planning
Design and planning involve architects, engineers, and consultants who work together to create the blueprints for the project. This is our job, as architects and designers. Our fees cover the work we do to take your vision and your ideas, turn them into a design concept, and coordinate with the team of consultants to turn this concept into something that can be built, meets safety standards, complies with regulations, and works with your budget.
Architectural fees are often calculated as a percentage of the total project cost. This percentage will be larger for a high-end project that is unique, personal, and rich with custom details. It will be a smaller percentage for a big project with many repeated or similar elements, such as an office tower where each floor has the same layout, or an apartment complex with similar buildings and units. Expect to see something in a range of 6-14% of your construction budget to be proposed as architecture fees as you begin your contract negotiations.
In many cases, the main consultants and engineers are hired by your architect and their fees will go through their billing. Specialty consultants like A/V designers and spa consultants are additional costs not covered within the architect’s scope, under most contracts.
These are all agreed upon at the beginning of a project, but your contract will be clear how changes and additions will be handled as part of your soft costs. Usually these are negotiated as additional services with additional fees. Clarity and communication are key to keeping your budget in line. That being said, if you have a new idea, or something comes up that you want to add that will make you happier with the end result, it’s worth paying a bit more during the design process to get your project to turn out right.
Permits and Legal Fees
Permits and legal fees are necessary for compliance with local regulations. These include building permits, zoning approvals, community guidelines and homeowner associations, and environmental assessments. Each jurisdiction has its own set of requirements, which can affect your costs and your timeline. In some places it takes more than 6 months to go through the permitting process while in others we can get you through it in a matter of days.
Delays in securing permits can be frustrating and expensive. Your architect will be doing everything they can to help the permit process go smoothly, but bureaucracy is unpredictable. Including a buffer in the budget for permit-related costs and timelines is advisable.
Legal fees often involve hiring attorneys to review architectural contracts, handle disputes, or navigate regulatory challenges. It’s good to have clear conversations up front, ask the hard questions and understand what is in your contract. Legal fees can add up quickly. Anything you can do up front to avoid involving lawyers down the road is worth doing.
Project Management
Project management costs cover professionals who oversee the construction process. This includes creating schedules, managing budgets, and coordinating between contractors, suppliers, and clients.
Depending on the project, your architect may have a dedicated project manager to handle this coordination, or the role will be handled by an architect working both as designer and project manager. Your contractor may have their own project manager to oversee coordinating their subcontractors, pricing, and everything that happens on site. Their expertise helps avoid delays, budget overruns, and quality concerns.
The cost of project management depends on the scope and complexity of the construction. For larger projects, a dedicated team may be necessary, which can add expense in one column, but ideally reduces cost and risk overall.
Marketing and Financing Costs
Marketing and financing costs are particularly relevant for commercial or residential developments intended for sale or lease. Marketing expenses may include advertisements, promotional materials, and staging. If you are looking to promote your project to pre-sell units or to build public support, these expenses will factor into your soft costs.
Financing costs involve interest on loans and other related fees. These costs can begin accruing as soon as funding is secured—in some cases a construction mortgage will be released at certain milestones over the course of the project, delaying the burden of financing costs. For large-scale developments, these costs can represent a significant portion of the overall budget.
Key Differences Between Hard and Soft Costs
Hard and soft costs differ significantly in their nature, timing, and impact on construction projects. Understanding these differences helps in creating a more balanced budget. Below are the key distinctions:
- Nature of Costs:
- Hard Costs: Tangible and physical expenses, such as materials, labor, and equipment.
- Soft Costs: Intangible and service-related expenses, such as design, permits, and management.
- Timing:
- Hard Costs: Primarily incurred during the construction phase.
- Soft Costs: Often incurred before construction starts and may extend after completion.
- Impact on Budget:
- Hard Costs: Easier to estimate due to tangible nature, but still fluctuate.
- Soft Costs: Can be unpredictable due to regulatory or legal factors.
- Examples:
- Hard Costs: Bricks, steel, carpenters, cranes.
- Soft Costs: Architectural design fees, permits, project management salaries.
How to Balance Hard and Soft Costs in Construction Projects
Balancing hard and soft costs is essential for successful project management. You’ll be working with your architect and contractor to establish and update your budget at several points throughout the process.
If your project is going over budget, you will have to make hard decisions. Do you reduce the size or scope? Do you lower the quality, cutting details or finishes that you like? Or do you increase your budget?
Common Challenges in Managing Hard and Soft Costs
Managing both hard and soft costs can be challenging due to their distinct characteristics and potential for unpredictability. Here are some common challenges and how they manifest:
- Challenges with Hard Costs:
- Price Volatility: Sudden increases in material prices.
- Labor Shortages: Delays and higher costs due to lack of skilled workers.
- Equipment Downtime: Delays due to machinery availability or breakdowns.
- Challenges with Soft Costs:
- Regulatory Delays: Time-consuming approvals.
- Unforeseen Legal Issues: Additional legal support required.
- Scope Creep: Mid-project design changes increase cost.
- General Challenges:
- Budget Overruns: Misallocation of funds.
- Communication Gaps: Misunderstandings between stakeholders.
- Lack of Contingency Planning: No financial buffer for surprises.
Strategies to Overcome Challenges
- Use fixed-price contracts to reduce price risk.
- Hire reliable contractors with strong supplier networks.
- Start permitting early and define scope clearly.
- Have clear, thorough contracts from the start.
- Allocate a contingency fund (5–15%).
- Review budget at each milestone and communicate openly.
Conclusion
Understanding hard and soft costs is important for managing your projects.
By planning carefully, monitoring expenses, and addressing challenges proactively, you can give yourself the best shot of keeping your project on track.
Building a building is a lengthy process, with layers of complications. Rarely does a project unfold without some new wrinkle or surprise. Prepare yourself for the unexpected with education and preparation and you will save time, money and stress.
