Hard and Soft Costs With Construction

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After Income Taxes Are Paid!

When asked to define costs in construction, the standard response includes land, materials, labor, subcontractors and equipment. All of these are required to build a home or any type of project. This would appear as a good answer. Notice how all the items are tangible in nature. You can see the land, touch the materials, shake the hand of the worker and smell the fumes from the exhaust of the equipment. These costs are commonly referred to as hard costs. They are directly measurable to a job. However, there are other costs that are necessary to get the house or project completed.

These other costs don’t really transfer once the project is done; they seem to just dissipate into thin air. Here are some examples:

  • Transportation of the materials and labor to the job site
  • Insurance
  • Communications
  • Project Management
  • Permits/Inspections/Compliance
  • Debris removal, port-a-john, utilities while the project is under construction
  • Interest on the capital to build the project

All of the value of these costs disappear once the project is over. You don’t leave the port-a-john or the environmental barrier behind once the house is sold. All of these costs are commonly referred to as ‘Soft‘ costs with construction.

Sure, all of the costs above are required, but why do we need to know the difference between hard and soft costs? The answer is simple. When estimating or valuing the end result of all this work, we have to ‘Markup‘ our costs in order to calculate the final sales price for the contract. It is almost impossible to markup soft costs. Yes, it can be done; it requires some pretty smart accountants to do it, but it can be done. That level of administration is expensive and thus, small contractors (contractors with sales less than $50 Million per year) can’t afford to pay for this level of sophistication. Therefore, smaller contractors markup on hard costs only. Thus, a contractor must understand the difference between ‘Hard‘ and ‘Soft‘ costs.

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