SOFT COSTS

Soft Costs – Indirect Construction Expenses

In plain language: Soft costs are the indirect, non-physical expenses that go into a construction project, like architect fees, permit costs, or loan interest. They are typically in contrast with "hard costs," which are the costs of physical construction labor and materials.

Technical definition: Soft costs encompass all of the indirect expenses associated with a construction project, often appearing in line items outside of the direct labor or material costs.

They include design fees, legal fees, inspection fees, and financing costs, among others. Soft costs are an important aspect of total project cost and must be accounted for during cost estimation and cost management, regardless of the project delivery method.

You could have the most detailed blueprint for a construction project, but if your construction budget doesn't include soft costs, you could be looking at an underfunded project. Soft costs can make up a significant portion of your budget, influencing project costs and the project timeline.

TL;DR

Soft costs are indirect costs in a construction project.

They impact budgeting, cost management, and project timeline.

It's common to underestimate or overlook soft costs.

Proactively tracking and estimating soft costs can prevent budget overruns.

What Is Soft Costs in Insurance?

The concept of soft costs goes beyond being simply financial accounting terms; they're instrumental in understanding how money is managed, allocated, and spent during a construction project.

Soft costs can include everything from the cost of acquiring legal permits and zoning approvals to architectural and engineering fees, professional services such as project management and construction management, as well as insurance premiums and financial management costs, to name a few.

For a construction project, the budget isn't just about the hard costs, the physical expenses like building materials and labor costs, which can be more directly estimated. Soft costs, on the other hand, are more variable and can dramatically influence the overall affordability and viability of a project. This influence becomes more prevalent when considering that these costs contribute significantly to the total project cost.

Construction soft costs can appear and are calculated at different stages in the project, making them a recurring element that demands constant attention throughout the project lifecycle.

Key Related Terms to Know

Hard costs – The direct, tangible expenses in a construction project like purchasing materials or paying for labor.

Direct costs – Costs that can be traced directly to a specific project, product, or service like materials or labor expenses.

Indirect costs – These are not directly attributable to a specific project or service but are necessary to run the business.

Construction management – The process of planning, coordinating, and controlling a project from inception to completion.

Common Questions About Soft Costs

How Do Soft Costs Affect the Construction Project?

Soft costs can significantly influence a project's budget and timeline. If not estimated and included accurately in the project budget, it can lead to budget overruns and extended timelines. An example of soft costs is the cost of project management, which plays a significant role in aligning the construction budget and the project timeline to achieve project deliverables.

Can Soft Costs Be Avoided or Reduced?

While some soft costs are obligatory, like permits and insurance, others, such as certain professional services, can potentially be negotiated or reduced. A meticulous cost tracking strategy is vital to identify areas of potential savings or optimization.

Are Soft Costs Covered by Builders Risk Insurance?

Builders risk insurance generally covers direct physical loss or damage to the structure but can be extended to include specific soft costs. However, this often varies by state and carrier; always check the specific policy form.

What Is The Difference Between Hard Costs And Soft Costs?

The key difference between hard and soft costs lies in their tangibility and predictability. Hard costs are direct, tangible costs related to physical construction such as labor and material costs, while soft costs are indirect, less predictable expenses such as legal fees and cost of inspections.

Soft Costs vs. Hard Costs

In a construction project, it's essential to understand the difference between soft costs and hard costs.

Comparison Area	Soft Costs	Hard Costs
Primary use case	Accounted for during cost estimation and financial management	Directly linked with physical construction activities
Coverage / concept type	Indirect construction costs	Direct construction costs
Typical exclusions	May exclude some optional costs like some professional services	Includes all physical construction costs
Who is most affected by errors	Project financiers and managers	Contractors and workmen
Common mistakes	Not being accounted for in the construction budget	May be overlooked if not directly linked to construction

Real Claim Examples Involving Soft Costs

Scenario 1: A construction project suffered delays due to unforeseen regulatory issues that raised legal fees and extended loan interest payments. These are examples of soft costs that stressed the project budget, underscoring the importance of properly estimating and preparing for such indirect expenses.

Scenario 2: Construction on a commercial property was halted due to a fire directly caused substantial hard costs. But the delayed project timeline increased soft expenses, such as extended insurance premiums and higher project management costs, worsening the project's financial strain.

Scenario 3: An improperly installed HVAC system led to late-stage project changes, increasing hard costs in labor and materials. These changes also contributed to escalating soft costs, including architectural and engineering rework fees, emphasizing the ripple effects of project issues on both hard and soft costs.

Limitations and Common Mistakes

Considering only hard costs in the construction budget, overlooking soft costs.

Neglecting the possibility of soft costs variability over time.

Mistaking soft costs as non-essential or optional, leading to potential budget overruns.

Failing to adequately insure soft costs, exposing the project to financial risk.

How to Explain Soft Costs to Clients

Personal Lines client "Let's say you're building a house. Of course, you have the money for bricks, cement, and labor – that's just like buying ingredients for a recipe. But what about fees for the architect’s design, permits to build, and interest on your construction loan? Those are your soft costs – like paying for the cookbook, kitchen tools, and electricity to cook."

Small Business owner "Just like in your business, a construction project has overhead costs too. We call them soft costs. They include things like all the planning, legal, and administrative work that goes behind the scenes of the actual construction. They might not be physical, but they're just as real when it comes to your budget."

CFO or Risk Manager "From a financial standpoint, soft costs are the indirect costs associated with a construction project. They include design fees, legal fees, inspection fees, and financing costs, which need to be budgeted for alongside the direct costs. As you know, overlooking these costs can severely impact the project's profitability."