When preparing a for a real estate project, there are so many costs to build into your budget. Many costs fall under two main categories: hard costs and soft costs. Breaking your budget down using these categories helps to get a better sense of all items that make up your project budget. It’s important to understand not only the anticipated costs associated with your project, but also the assumptions that your estimates are based on. Putting together a budget can be complicated enough, but the first step is understanding the difference between hard costs vs soft costs.
You might also hear hard costs referred to as “brick-and-mortar costs.” Either term refers to any costs associated with the physical construction of the building and any equipment that is fixed. Hard costs can be related to the building’s structure, the site and to the landscape. All labor and materials required for construction are included in hard costs. In terms of the building site, all utilities, life safety systems and equipment, HVAC systems, paving, grading etc. are considered hard costs. Hard costs associated with the landscape are based on the architectural drawings and include grass, trees, mulch, fertilizer, etc.
Generally, hard costs are more tangible and therefore easier to estimate. The range of hard costs varies widely, but tend to be most expensive in the Northeast.
In short, soft costs are any costs that are not considered direct construction costs. Soft costs include everything from architectural and engineering fees, to legal fees, pre- and post-construction expenses, permits and taxes, insurance, etc. Soft costs also include movable furniture and equipment (as opposed to fixed equipment included in hard costs) such as computer data equipment, telephone systems, etc. Depending on the project, soft costs can also include expenses that continue after completion such as building maintenance, insurance, security and other fees associated with the asset’s upkeep.
It is also worthwhile to note that LEED Certification is considered a soft cost. However, LEED Certification can also impact hard costs as certain LEED qualifications have to do with the materials used to construct the building. LEED Certification can be budgeted at an additional 2% in hard costs; budget for soft costs depends on the scale of the project.