To accurately estimate and plan for a construction project, a subcontractor’s budget must incorporate both construction soft costs and hard costs. Soft costs can represent a significant portion of construction costs, so it’s essential that you understand what they are and how they factor into your projects.
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What are Soft Costs in Construction?
Construction soft costs are expenses that aren’t directly tied to the construction of a building or project, like the labor or materials. These expenses are often related to non-tangible items like inspections, permits, rentals, insurance and administration costs. In some cases, a soft cost to a general contractor can be considered a hard cost to the owner, because the owner is invoiced for it. Similarly, a soft cost for a sub can be a hard cost for the GC. Soft costs can vary widely by project and location, and they can be incurred at any point of the construction timeline, from pre-construction to post-construction.
Hard vs. Soft Costs
Hard costs represent the actual cost of materials, labor, and equipment that go into constructing a project. Compared to construction soft costs, hard costs are often tangible and more easily quantifiable. Hard costs can usually be accurately calculated once plans and specs are completed. Soft costs, on the other hand, are harder to estimate because expenses like service fees can fluctuate.
Examples of Soft Costs
There are many different types of soft costs in construction. Some are fixed costs, while others vary based on the project.
Here are some of the more common soft costs in construction for subs (which differ from project owner soft costs):
- Inspection fees: This includes costs related to building inspections and permitting costs.
- Equipment, rentals, and tools: While construction equipment is typically a hard cost, some expenses can be considered soft costs if they are not directly related to the final project delivery, such as office equipment or radio communication tools.
- Loan interest, accounting, and insurance fees: During the project, you can also incur soft costs including bank transaction fees, costs for timekeeping and accounting software, and professional liability insurance premiums.
- Taxes: Taxes on a project assessed by local and state agencies are considered soft costs.
Additional soft costs can include fees related to project management, surveys, consultants (health and safety consultants, testing consultants, etc.), and other professional services.
What Percentage of Construction Cost is Soft Cost?
Soft costs generally account for about 30% of project costs. However, this number can vary widely — between 25% and 75% — depending on the specific project and the type of construction you’re performing. Soft costs generally increase as on more complex projects, as you will likely need to involve a larger variety of inspections and professional services.
Are Soft Costs Deductible?
Because soft costs can easily exceed tens of thousands of dollars, it’s important for construction contractors to understand the tax implications of these expenditures. Because soft costs can vary so widely, tax guidelines can be complex. For example, some soft costs may be deductible as a business expense. Subcontractors may deduct some of the costs of business operations, business use of a personal vehicle or certain business travel expenses. Like any business owner, subs can also deduct the rental cost of their office space, which may be considered a soft cost.
On the other hand, soft costs may also have financial benefits. For instance, some costs associated with LEED certifications (Leadership in Energy & Environmental Design) can be considered soft costs, and LEED certifications can offer tax credits.
While soft costs may not be directly related to the construction of a project, they are a necessary part of your budget. Understanding what they are and how to incorporate them into your costs can help ensure your project plan is accurate and reliable.