No matter the size of the real estate development you're working on, it's crucial to have a pulse on costs at any given time. This includes both the hard cost data and soft cost data.
To ensure projects are coming in under budget, it's vital that your commercial real estate team fully understand the concept of "soft costs."
Hard Costs vs. Soft Costs
Real estate project costs fall into two main categories: hard and soft costs.
Hard Construction Costs
Hard costs are directly related to the construction of your project. You may hear these referred to as "brick-and-mortar costs" because they include the structure, construction site, and landscape. A few simple examples you've certainly paid for in the past include a building's new HVAC system and paving a parking lot.
For budgeting purposes, hard costs are tangible. You know your building needs an HVAC system, you know what an HVAC system is, and you know roughly what it will cost. Therefore, they are easier to estimate.
Soft Construction Costs
Soft costs are indirectly related to the materials, labor, or the physical building of the project. This could be design work, insurance, paychecks, taxes, land permits, appraisal fees, and other bills accrued. These are any costs that are not considered direct construction costs. They are considered "soft" because they are intangible.
More than likely, your project is being funded by a lender or investor. Financial transactions involve fees that are considered soft costs, including loan-generated interest, bank transaction fees, accounting expenses, timekeeping and accounting software costs, construction loan commitment fees, mortgage broker fees, and permanent commitment fees.
Why Preparing for Future Soft Costs Is So Important
Early on in your project, soft costs are easy to place on the backburner because they may seem less concrete than the tools and materials you know are required. Let's stick to the same example above. You know you need an HVAC system, but you may not factor in the total cost of the architect who will be responsible for finding a place for that system in your building. You'll have architecture and design fees before your project is actually under construction. Feasibility studies, master planning, design work, and related costs are all accrued before your project even breaks ground.
Soft costs don't end when construction ends. Depending on the type of project, you could continue to incur legal fees and operating expenses, even years after the project's conclusion. It never hurts to prepare for the worst, so having some money allocated in a legal fund is wise.
Remember, past historical data is critical to project preparation and accurately anticipating your project's soft costs. Because this past data tends to be spread across different spreadsheets and not quickly accessible, commercial real estate teams can sometimes forget to include small things like bank transaction fees, state taxes, engineering fees, site work expenses, and liability insurance into their anticipated project costs. It's easy to omit or underestimate reserves for these if you're not looking at what they cost during previous projects.
According to DAE Group, soft costs can typically account for roughly 25 to 75 percent of a total construction budget. Varying project specifications and changing economic factors can make estimating soft costs even more difficult. The accuracy of an estimate can make a difference in whether or not a project comes in on time and within budget.
How to Leverage Commercial Real Estate Software to Plan For Soft Costs
Quantifying soft costs early in the project is vital to calculate your final project delivery return on investment. It's not enough to have the data related to your soft costs. Too often, teams waste half a workday tracking down cost data to make informed cost projections when data is stored in varying spreadsheets, stacks of paperwork, or a coworker's memory. Without centralized cost data, the time it takes to do basic project management work skyrockets.
You want soft cost data to be easily searchable by your project team members. Commercial real estate software brings increased transparency and visibility to your project. Instead of relying only on a monthly, backward-looking cost report, all financial partners can see soft costs in real-time and understand project progress.
The real-time data doesn't just benefit financial partners, though. Your project manager is empowered to see budget actuals and make cost decisions based on how each budget line is trending. So you don't realize that a budget line went way over after the fact and have to explain why your project exceeded budget expectations.
Having a single data source is important to a project's success, from the earliest stages of securing financing to finishing construction By centralizing all data – including proposals, contracts, change orders, and invoices – in the cloud and intelligently indexing all key project data, your entire team can find and leverage any document or data point needed to make fast, pivotal decisions.
We understand the tremendous benefits that AI-powered data and analytics can bring to a project, and we have seen it first hand. With the help of Northspyre's commercial real estate technology, our clients have managed more than $50 billion in projects, saving up to 6% in construction costs and driving more efficient development timelines.
Want to learn more? Check out Northspyre for free here.
Tag(s):
Real Estate Development