Money is money, but when it's being spent on a real estate development project, it helps to know how it's being spent. Whether you've got a commercial or residential project in progress, it's important to look at your total project budget in terms of hard versus soft costs.
What's the difference between hard and soft costs?
Hard costs are those expenses directly related to the physical construction -- the site, the landscape, the labor and materials, and the building itself. Consider the hard project costs as the literal nuts and bolts of a construction budget.
Soft costs, on the other hand, are those expenses indirectly related to the construction project. However, they can certainly get in the way of construction if they aren't paid for in a timely manner. Soft costs can include the necessary paperwork, filings, permits -- not to mention the people who need to be paid to complete all of these. These expenses might be "soft," but they can hit hard because they aren't always visible, and yet when a project is behind in the timeline, they seem to be everywhere. (Insert sound of ringing cash machine.)
Here are some examples of each cost:
|Hard Costs||Soft Costs|
• Labor costs and materials.
• Safety equipment and systems.
• Sod/grass seed.
• Engineering fees.
• Inspection fees.
• Legal fees and other professional fees.
• Property maintenance.
For estimation purposes, hard costs are easier to deal with because they're tangible -- and therefore much more easily identified than soft costs. For example, you know you will need sod, flowers, trees, etc., to fill the grounds of your new property. You can estimate what those costs will be and perhaps find ways to reduce those costs by choosing fewer or different items.
Soft costs are tricky because they're often full of surprises, like buying a residential property only to learn that it's riddled with termites or purchasing office space only to learn that it's not up to Occupational Safety and Health Administration (OSHA) standards.
Another thing to consider is that costs vary greatly depending on the geographical region. Construction projects in the Northeast tend to require heftier budgets than those in the South. While it's unavoidable if you plan to stay in the same region, it's something to think about as you start branching out to build in other markets throughout the country.
There's one cost you might have noticed was missing from the list: LEED certification. This important, eco-friendly credential straddles the line between a hard cost and a soft cost. It starts out as a soft project cost in that it affects the design (and designer's) budget. But it quickly trickles into hard cost territory, because the LEED-certified design affects how materials are used in construction and installation. In fact, LEED certification can raise soft costs by about $150,000 and hard costs by about 2% of the budget.
But there's good news: LEED certification often comes with benefits like tax credits, grants, and fee waivers. So real estate developers should feel good about spending some green to go green.
The Millionacres bottom line on your bottom line
Real estate is expensive. Building real estate is even more so. It goes without saying that real estate investors need to keep an eye on their budget and timeline. However, gaining a greater understanding of hard versus soft costs can help in seeing where costs are necessary and where they can be reduced.
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