A construction budget is not a simple checklist of nails and wood. The budget for any construction project is massive and includes both hard and soft costs. Hard costs are what is spent physically constructing a building. Soft costs go toward things that aren't physically solid but are just as vital, such as design costs, legal fees and permit processing. Soft costs represent a smaller part of the budget than hard costs.
TL;DR (Too Long; Didn't Read)
Hard costs are your “brick-and-mortar” costs to actually construct the building. Soft costs are not tangible and include expenses such as loans, permits, insurance, marketing costs and taxes.
What are Hard Costs?
The hard costs of a project are the parts of your project you can actually see. This includes everything from the foundations and the structure to the detailed interior finishes, combined with electrical wiring and plumbing and the furnishings. The labor involved with putting the structure up is also a hard cost. Hard costs per square foot vary according to the project type. If a customer requires state-of-the-art precision engineering – a high-tech manufacturing facility, a research lab – the costs per square foot will be higher than an ordinary office building.
What are Soft Costs?
Unlike hard costs, the soft expenses aren't instantly visible. These are the fees that pay for the the small details that get the job done. They include, for example, design fees, management fees, legal fees, taxes, insurance, financing costs and administrative expenses. Legal requirements can increase soft costs. For example, the government may mandate the design include certain environmental features. Meeting all the required points to earn a Leadership in Energy and Environmental Design (LEED) Certification is considered part of the soft cost. Permits and the fees attached will fall into the soft costs category as well.
Soft Affects Hard
The work covered by soft costs has a direct effect on the hard costs. The more efficiently the architect's design uses space, the lower the hard costs may be. The American Institute of Architects says that the simplest, easiest building to construct would be simple and square, but that doesn't make the building very attractive. Adding notches and shadow lines to the building envelope can improve its appearance, but the complexity of constructing them can increase the hard costs. The LEED Certification falls under soft costs, but plays a big part in the building materials budget in the hard costs.
Impact on the Construction Budget
Even after all this, hard and soft costs don't comprise the total construction budget. The cost of purchasing the land is a separate item, and the contractor's budget itself usually includes more than the company's costs; the contractor figures in overhead, profits and usually a contingency budget. A contingency budget equal to 10 percent of hard costs can protect against the unexpected, such as the client requesting a sudden change. Soft costs are more predictable, so there's less need for contingency.
Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com