When preparing a budget for your next real estate project there are numerous costs associated with the building that it’s tough to know what every cost means. Many project costs will fall under two main categories: hard and soft costs. Putting together a project budget can be a daunting task, but what you need to do first is to understand the difference between hard costs vs soft costs.
At a very high-level, hard costs include expenses directly related to the physical construction of a building. In comparison, soft costs are any expenses that are not directly related to construction costs.
Also referred to as “brick-and-mortar costs”, hard costs are associated with the building’s structure, the construction site, and the landscape. Due to hard costs being more tangible, they are much easier to estimate when you’re creating a project budget. You will also need to account for all the labor and material costs to complete your project, which is included under hard costs.
Additionally, in terms of the building site, you can expect to place all utilities, cement, life safety systems, and equipment, paving, grading, HVAC systems, etc. under your hard costs. In regards to landscape, you will need to place grass, fertilizer, trees, mulch, etc. under hard costs.
Hard costs are relatively easy to estimate due to the fact that you know what materials you will need and how much you will need before the project has begun. Also, it is important to note that hard costs are not incurred once the project is completed.
Seen as less material than hard costs, soft costs are not often visible. These expenses are costs that are not directly related to labor nor the physical building materials needed. Due to soft costs being intangible, they are harder to estimate when you’re creating a project budget.
Typically soft costs include everything from architecture, inspection, accounting, and engineering fees to permits, taxes and legal fees. Additionally, you can expect to place movable furniture, computer equipment, telephone systems, etc. under soft costs as well.
For example, the project could be completed, but you have legal fees that you need to continue to pay. It is common that you will have to pay for items long after the project is finished, such as property maintenance, insurance, and security.
Before you begin to plan your project the first step is determining a reasonable budget. This is where you will need to know the difference between hard costs vs soft costs. Remember that hard costs are directly related to the building of a structure and soft costs are indirectly related. It is always wise to allocate more money towards soft costs because you never know when hidden fees or expenses might appear.
For more information on hard costs vs soft costs please contact AVANA Capital today. One of our industry professionals can provide you with the necessary information you need to create a detailed budget for your next project.