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In commercial real estate development, your expenses will fall into two categories; construction soft costs and construction hard costs. Soft costs are related to predevelopment, like purchasing land, hiring architects, and paying inspection fees. By contrast, hard construction costs are directly related to the physical construction of a building.
They also represent around 70 to 80% of a real estate project’s entire budget. The consequences can be devastating if a developer doesn’t have clear budget visibility when starting and executing a project. Frequent budget overruns and construction delays can turn a lucrative project into a reputation-damaging disaster.
To avoid worst-case scenarios, you must know what kind of hard costs you’ll be facing and how to keep them under control.
The Difference Types of Construction Hard Costs
The “brick-and-mortar” expenses for any real estate development project are diverse and extensive. On the bright side, this part of your budget is much easier to quantify than soft costs.
- Building Materials: The wide range of items used in building construction. Concrete, lumber, steel, and drywall, metal framing, insulation, stone, glass, nails, bricks, adhesive tools, carpet, electrical wiring, and any equipment rented to facilitate construction.
- Labor: The people responsible for the physical construction of a building’s structure. Construction workers, electricians, engineers, interior designers, landscapers, HVAC installers, carpenters, security personnel, and other contracted service providers.
- Site: The changes that need to be made to a plot of land or existing structure to facilitate a real estate development project. Ordinary site expenses include setting up utility infrastructure like gas and water pipes, electric cables, drains, temporary waterproofing materials, pavement, sewers, gravel, and sprinkler systems.
- Landscaping: The planting of trees, shrubs, and grass and the installation of exterior art, walkways, lights, and benches.
- Overhead: Costs associated with general job site conditions such as temporary staff facilities, security and safety personnel and equipment, and parking space.
- Contingency: Money held in reserve from vendor payments to cover unexpected expenses related to change orders and weather-related delays.
Estimating Your Construction Hard Costs
Knowing what type of hard costs to expect with your next project is only the first step in creating a budget. Many variables will have a big influence on your budgetary commitments, and you’ll want to account for them. For example, different real estate asset classes come with specific regulatory requirements and market demands that must be accounted for during the design process.
Let’s say you’re working on a complex warehouse project. One of the most important hard cost considerations you’ll have to make with that kind of building is how you’ll address its heating, ventilation, and air conditioning requirements. Because those features come with high electricity costs, you'll want to make it as energy efficient as possible.
To address those demands, you could have an architect incorporate a clean energy solution like transpired solar walls into the facility’s design. Since solar walls heat spaces with solar energy, they are a much more cost-effective alternative to traditional HVAC systems. Plus, thanks to the passage of recent legislation, there’s now a big financial incentive to embrace environmentally friendly building designs.
However, complications like the ongoing “extreme supply shortage" of necessary photovoltaic raw materials could make the solar walls concept unworkable.
To determine the best way forward, create hard cost forecasts incorporating conventional and alternative building materials. By comparing those projections, you can evaluate whether investing in a green building development strategy would make financial and logistical sense. Taking a data-driven approach to estimating your hard costs will go a long way toward keeping them on track in the long term.
How to Control Your Project's Construction Hard Costs
Once you’ve created a project budget, your next priority will be moving to take control of your hard costs. Unlike soft costs, your brick-and-mortar expenses are vulnerable to on-the-ground disruptions. For instance, a problem with establishing a building’s underground utility infrastructure could prompt a major budget overrun and schedule delay. However, you can mitigate the impact those hiccups have on your project by tracking your expenditures in real-time.
The main benefit of monitoring your spending as it happens is high-level visibility. When reviewing change orders and invoices from hundreds of vendors on a day-to-day basis, it becomes hard to see the forest from the trees. But from a 30,000-foot perspective, it’s much easier to identify patterns that will inevitably become major cost overruns and take steps to prevent them.
Using the utility infrastructure example, having a complete picture of your anticipated costs will help you understand your options. You can find out if you have enough contingency with the vendors involved to absorb the expense. And if not, you figure out which part of the project has funds available that you can reallocate.
However, it's essential to remember that legacy real estate development software can limit your ability to be proactive. If you need to consult hundreds of emails and many spreadsheets to understand your hard costs and to date versus your anticipated expenditures, you won’t be able to make high-level decisions very quickly. Conversely, modern AI-driven platforms can provide you with proactive cost overrun warnings and insights into how to best resolve those issues.
Controlling construction hard costs isn’t easy because real estate development is an incredibly volatile business. But with the right approach and tools, you can be flexible and dynamic in the face of the unpredictable.
Download our How to Cut Real Estate Development Costs by 2-6% eBook for more tips on how to make your next project as cost-effective as possible.
Tag(s): Real Estate Development
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