Construction project costs can add up quickly. Materials, labor, permits, and inspections are some of the numerous costs construction companies incur. When companies and contractors miscalculate expenses, they get stuck with unprofitable projects. These projects take away the time and money that could have been allocated to profitable projects. Establishing budgets for your hard and soft costs will mitigate this risk. Using budgeting best practices before embarking on a project maximizes profits and makes it easier to gain market share. We will discuss how you can anticipate hard cost soft costs so your expenses don’t get out of control and how to budget for hard costs vs. soft costs.
What are Hard Costs?
Hard costs are the expenses related to on-site work. These costs have a direct impact on the construction’s progress. Therefore, any resource, asset, or person that stays on-site will count as a hard cost.
Hard Costs in Construction
Construction businesses have numerous hard costs in construction. These are some of the most popular costs.
Raw Materials
You cannot start or finish a project without adequate materials. You will have to order them from a supplier or keep them in your inventory. Construction companies and contractors with limited funds due to payment delays can get raw materials with a material financing company.
Construction Equipment
Having the right construction equipment is vital to completing a project. However, you may have to occasionally repair the equipment. You can lease or purchase the equipment, depending on your business experience and available funds. Construction companies with multiple decades of experience usually acquire equipment, while new companies start by leasing equipment to preserve capital. Regardless of how you pay for your equipment, those assets count as hard costs.
Utilities
Gas, electric, plumbing, and other utility costs add up during a construction project. Construction companies and contractors assume these costs for their clients.
Direct Labor
Every construction project needs workers on site to complete the building. You will have to pay their salaries and provide them with protective equipment based on federal regulations.
What are Soft Costs?
Soft costs don’t happen at the construction site, but they allow you to proceed with the project. These expenses happen behind the scenes.
Soft Costs in Construction
Construction companies and contractors will recognize these small costs. They are essential to the successful completion of any project. Creating a list of soft costs during the budgeting process will ensure you don’t forget to anticipate certain expenses in your financial plans.
Insurance and Legal Costs
Construction companies use insurance policies to limit liability and provide an extra layer of financial protection. However, even with insurance policies, companies and contractors can still get sued. These soft costs don’t get you closer to a finished project, but anticipating them in advance reduces the likelihood of them making a big dent in your available funds.
Accounting
A construction business requires a more advanced type of accounting. Companies seek construction accountants instead of regular accountants for this role. Construction accounting reveals how each project will affect your company’s financials and taxes.
Permits, Fees, and Taxes
No business owner can get out of tax payments, but the construction industry has two additional expenses. Construction companies and contractors need permits to work on-site, and they have to pay fees to receive those permits. Permit fees depend on the location and scope of the project.
How to Budget for Hard vs. Soft Costs in Construction Estimates
Creating cost estimates gives you an idea of how much a project will cost. Of course, the final expenses can exceed estimates, but setting budgets will make you more attentive to your costs. Construction companies and contractors can use these strategies to budget for hard and soft costs.
Know the Difference Between the Two
We have discussed the differences between hard costs vs. soft costs, but you should separate them in your budgeting. Grouping every expense under the same umbrella can create confusion and result in overspending.
Communicate Well with Your Stakeholders
Explain how you arrived at your estimates and keep your stakeholders in the loop. Maintaining strong relationships is essential to getting more projects and increasing your market share.
Break the Project into Stages (Planning, Design, and Construction)
Breaking a construction project into multiple steps makes it more manageable. Workers can concentrate their efforts on the current stage and work in unison instead of following a scattered list of tasks. Incorporating punch lists in the process will ensure every task item gets completed instead of missing key details. In addition, budgeting hard and soft costs with a punch list for each project stage can help you set more realistic budget expectations.
Account for Every Predictable Factor
You can’t control everything that happens on a construction site. For example, a worker can make a mistake, or the prices of raw materials can go up from the project’s starting date. However, you can account for many factors. Create a list of every predictable element you can think of and determine how much each factor will add to your budget.
Forecast for Unforeseen Factors
Leaving space in your budget for unforeseen factors gives you a buffer. Creating a budget that does not account for unforeseen factors can frustrate clients and increase your costs. Operating with a narrow margin of financial safety can become dangerous, as it may incentivize cutting corners, whether by a company’s directive or a client’s request. Unforeseen factors can also tighten your cash flow.
Allow for Contingencies
Contingencies are additional funds that go towards unexpected construction costs. Creating room in your budget for repairs and mistakes will increase your financial flexibility. You should add 5%-10% to the construction budget to account for contingencies.
Work with People Who Have Industry Expertise and Knowledge
Working with the right team of experts will minimize mistakes and make costs more predictable. You can feel more confident about getting high-quality workers. Giving your workers suitable materials will help the project move along, but cash flow restraints can become a problem.
