Knowing the difference between hard and soft costs in construction is essential for effective project management. Keep reading to learn more about hard costs vs. soft costs in construction, how to distinguish between them, and the significance of doing so.
What are hard costs in construction?
Hard costs in construction are those tied directly to labor and materials. Examples of hard costs might include:
- bricks, concrete, and other materials
- hourly labor costs (i.e. time spent preparing the job site, building the structure, etc)
- the cost of moving materials and people to and from the job site
What are soft costs in construction?
While hard costs in construction are very easy to conceptualize, soft costs are less intuitive. This category includes costs that support the construction project but aren’t tied directly to labor or materials. Examples of soft costs in construction include:
- administrative labor costs (i.e. payroll expenses, paid vacation time, etc)
- construction insurance
- job site security
- structural maintenance
- utilities (in the case of long-term facility management contracts)
- job site permits
- construction management expenses (i.e. time office workers spend facilitating the project)
- post-construction (i.e. job site cleanup)
- project marketing
- insurance on loans borrowed to cover project costs
- legal fees
- equipment rentals
As you can see, while hard costs are fairly easy to conceptualize, soft costs are (by comparison) less tangible and can encompass a much wider range of budget items.
Why it’s important to track hard and soft costs in construction
Next, let’s discuss why smart construction management professionals track both hard and soft costs.
Achieve a more accurate understanding of the project’s true costs
Construction companies that only track hard costs run the risk of grossly underestimating their true expenses and profitability. This can result in severe miscalculations since soft costs are by no means insignificant, accounting for as much as 75% of expenses on the typical construction project.
More effective cost management
You can’t address what you aren’t measuring. Good metrics on both hard and soft costs help construction management professionals more effectively monitor and control all expenses.
The alternative often means treating soft costs as incidental, which (again, given soft costs can be such a significant percentage of a project’s overall budget) leads to poor management.
Knowledge of hard and soft costs leads to better estimating
Tracking both hard and soft construction costs has benefits beyond the scope of individual construction projects. It will also help you arrive at more accurate estimates for future projects, increasing your company’s overall profitability.
Some soft costs continue to be incurred after the project ends
While most hard costs are confined to the project’s duration, some soft costs have farther-reaching consequences. For example, if the construction project includes a long-term facility maintenance component, there may be additional soft costs such as maintenance and security.
Knowing about these costs beforehand can help your company plan more effectively and decide whether the contract will ultimately be profitable.
5 Tips for managing hard and soft costs in construction
1. Use dedicated resource management software
Resource and workforce management software helps construction professionals allocate and track the usage of resources, which is essential for assessing both hard and soft costs in construction.
Such software can also help you make better decisions about allocating resources in a way that ensures hard and soft costs amount to good investments. In other words, it can help you spot patterns. If you notice soft costs are high on particular types of projects (or projects involving certain variables), for example, you might be pickier about which projects in that category you take on and allocate resources to.
Click here to learn more about Bridgit Bench, our resource management software built specifically for the construction industry.
2. Periodically adjust your assumptions and data
Hard and soft costs in construction aren’t static. Rather, they change over time due to a variety of factors (i.e. inflation). Consequently, smart construction management professionals periodically update their calculation methodologies and data to ensure they’re up to date.
This is especially important when it comes to calculating soft costs in construction since that category includes expenses that can silently creep upwards over time if you aren’t paying attention.
3. Attribute soft costs (and bill for them) accordingly
Some soft costs in construction are directly attributable to client demands while others are more accurately viewed as operating costs for your construction company.
Being able to classify expenses appropriately is important as it can influence what you bill clients directly for vs. what you absorb.
4. Note which costs are associated with assets your company retains
Some hard and soft costs in construction are tied to assets your company retains long after a particular project has concluded. Examples might include:
- equipment purchased to facilitate a specific job (but which might be valuable to retain long after the job itself is completed)
- personnel your company hires to meet the demands of a particular project that can subsequently help with other work as well
Such assets (and the costs associated with them) have different implications (including for tax purposes) than one-time costs. It’s important that you know these implications and plan for them effectively.
5. Determine how your company’s expenses align with benchmarks
According to The DAE Group, soft costs typically account for between 25% and 75% of a given construction project’s budget. Your company’s exact percentage will vary depending on factors such as its location, size, and the type of construction work it completes.
Determining an appropriate benchmark based on comparable companies and measuring your firm’s metrics against it can be helpful for determining whether your soft or hard costs are reasonable.
For example, excessive soft costs might indicate your company needs to either control its spending or rethink how it classifies expenses between the “hard” and “soft” categories.
Hard costs vs. soft costs in construction: Conclusion
We hope this article has helped you understand the difference between hard and soft costs in construction. To summarize, hard costs are those directly associated with building a structure whereas soft costs facilitate projects yet aren’t tied directly to materials or labor.
For more articles about construction management, visit our blog here.
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