Hard Costs vs Soft Costs: The Differences You Need To Know
Construction costs have soared in the last few years as demand has outstripped supply, but costs are gradually stagnating and have now fallen for four consecutive months. It’s not just hard costs that are volatile but soft costs, too.
Are you familiar with the difference between hard and soft costs? We’ll discover the nuances of each in a moment.
According to a McKinsey report, 69% of construction projects exceed their budget by around 10%. There are, of course, various factors at play in this – one of which is inadequate cost planning.
Understanding the difference between hard costs and soft costs will help you bolster your cost plans and bring stability to your construction projects.
Defining Hard & Soft Costs
Hard costs are expenses that are directly related to the physical construction process, while soft costs are indirect expenses that are related to planning and management.
- Hard costs are easier to quantify because they’re tied to specific construction activities and generally make up a larger portion of the total costs of a project.
- Soft costs are harder to estimate because they’re often spread throughout the project lifecycle, and they generally make up a smaller portion of the total cost of a project.
Since hard costs relate to tangible aspects of a construction project, you can be forgiven for thinking that land acquisition is a hard cost – but it’s not. Most professionals consider land a soft cost because acquisition takes place prior to the scheduled works.
What about furniture, fixtures, and equipment (FF&E)?
This includes both moveable furniture and fitted furniture that can be removed without damaging the structure of the building – for example, shelving.
As for repairs and maintenance involving physical labour after the construction is complete, these are categorised as soft costs. The same goes for gardening and landscaping costs.
The Main Soft Costs In Construction
When creating your cost plan, it helps to segregate soft and hard costs. Here are some of the main soft costs that you should include. Please note that this isn’t an exhaustive list and soft costs vary greatly in their nature.
- Planning: project management, coordination, and office support.
- Legal: legal fees, planning applications, and compliance with regulations.
- Insurance: various types of insurance coverage.
- Advertising: marketing and promotional activities.
- Repairs: maintenance and unforeseen repairs during construction.
- Security: on-site security measures.
- Rentals: facilities or temporary accommodation.
- Loans and financing: interest and fees associated with project financing.
- Design fees: architectural and engineering design services.
- Land costs: acquiring and preparing the construction site.
Remember, these are costs that are indirectly associated with the construction of a project – that is, the supporting costs that enable the physical construction of a building.
The Main Hard Costs In Construction
Hard costs typically account for between 70% and 80% of total construction costs. A few examples of these are:
- Materials: raw materials such as steel, concrete, and timber.
- Labour: wages and benefits for construction workers.
- Equipment: purchase or hire of machinery and tools.
- Utilities: connection of water, drainage, electricity, gas, etc.
- Mechanical systems: HVAC, plumbing, electrical, and fire safety systems.
Now that you know the difference between the hard and soft construction costs, it’s time to work up a solution for proactively managing them, before they spiral out of control.
Actionable Steps For Estimating Hard & Soft Costs
Accuracy is a must if you want to come in below budget. That means no more back-of-the-fag-packet calculations. You need to be methodical in your cost planning.
1. Understand the 5 levels of Cost Estimation
The Association for the Advancement of Cost Engineering (AACE) outlines five levels of cost estimation. Every level relates to the information that’s available at the time of estimation.
- Order of magnitude estimates: when minimal design details are available, these are used to prepare rough estimates.
- Study estimates: when early design details are shared, you can gauge the project’s feasibility.
- Preliminary estimates: when initial data on materials and labour is provided.
- Definitive estimates: when more detailed design information becomes available.
- Detailed estimates: when complete information on the design, labour, and material costs is available.
It’s common for contractors to progress throughout a project’s lifecycle without iterating the cost plan. Is it any wonder construction companies overspend when the budget is based on woolly estimates?
Maybe you’ve given an indicative quote to a customer who’s taken that as concrete. Be sure to manage customer expectations at the outset and let them know the
2. Use BuildPartner Cost Planning Software
Using BuildPartner cost planning software, you can prepare a detailed estimate in a matter of minutes for hard costs, based on minimal or early design details.
As for the five levels of cost estimation mentioned above, BuildPartner enables you to prepare:
- Order of magnitude estimates through per square metre rates.
- Study estimates at the takeoff stage.
- Preliminary estimates when scheduling the work.
- Definitive estimates after specifying the itemised costs.
- Detailed estimates at the point of analysing and collating quotes.
In that regard, it’s a full end-to-end process of cost planning for hard costs.
Whatever software or platform you’re using, your cost plan must include itemised costs. Not only does this give you transparency, but it’s important for the customer too, as it builds trust.
Having an itemised cost plan gives you greater customisation options. It’s so much easier for clients and contractors alike to adjust or remove certain components to better fit their construction budget requirements.
It also reduces the risk of errors and omissions. Ever accidentally forgotten to include the cost of an important component in a quote?
3. Bake A Contingency Plan Into The Price
Since over two-thirds of construction companies go over budget by at least 10%, it suggests that initial estimations are optimistic. It could be worse, though. Our government can scarcely manage a project like HS2 with incurring cost overruns of billions.
All manner of things can arise during project plans that contribute to overspend, such as:
- Changes to the construction schedule
- Scope or design changes
- Material price fluctuations
- Workforce availability
- Natural disasters, bad weather, or emergencies
With private firms, part of the reason for overspend is that firms are under-pricing to appear competitive and win bids.
That’s a commercial decision that only you and your team can decide, and you might be willing to risk it on smaller projects. But for the sake of accuracy, you should factor an additional 10% into more complex projects to cover any unexpected costs or delays.
Or, if you have access to historical data, use the percentage of overspend and apply that instead.
4. Track Running Costs
Cost planning isn’t a one-and-done process. Maybe you started out with a comprehensive spreadsheet, or maybe you’re paying for project management software – but are you using these tools to proactively track costs?
Ever find yourself saying, “There’s just not enough hours in the day”?
You’re too busy doing the actual doing, right?
We can all relate to this on a personal level. If we don’t check our bank statements, we quickly forget about our memberships and direct debits, and we’re oblivious to what we spend every month.
By virtue of tracking your expenses, you can act accordingly and:
- Stop buying expensive materials and source alternatives
- Identify discretionary expenses that can be cut
- Allocate funds based on strategic priorities
If you don’t track expenses, the profitability of your project is in the hands of the gods.
Final Word On Hard Vs Soft Costs
The success of any construction project hinges on the management of hard and soft costs. When a project’s stakeholders have full visibility of costs, it gives them greater control over the project’s outcome, to ensure that the vision translates into the desired outcome.
Frequently Asked Questions About Hard And Soft Costs
Here are a few questions that will provide some insight into hard and soft costs in construction.
How much contingency should a building project have?
The propensity to overestimate or underestimate a quotation varies by company, and the specific percentage depends on the complexity of the project. Those with access to historic data should take an average percentage of their previous overspend for similar projects. A general rule of thumb is around 10%.
What is cost planning in building?
Cost planning in construction is the process of estimating, managing, and controlling the costs. Those companies that adopt rigorous cost planning practices are more apt to stay on budget and within scope of a project.
What are fixed costs and variable costs in construction?
Fixed costs are constant regardless of the project’s scope or output, and they’re typically incurred before or throughout the construction process. Some of the main fixed costs in construction are salaried workers, office rent, and vehicle repayments.
Variable costs fluctuate as the project’s size or complexity grows and decrease as the project scales down. Examples of variable costs include materials, waste disposal costs, and subcontractor costs.