Construction of a house is divided into two stages. One of them is always discussed and involves physical work and materials purchased for the job. All the expenses under this category are called hard construction costs.
Although we all may or may not understand the process of house build, the stage that is often overlooked and budgeted incorrectly is soft costs.
This is a list of construction soft costs:
- Architectural Drawings
- City Permits and Other Fees
- Construction Reports and Studies
- Builder and Management Fees
- Profits, Expenses, marketing
- Insurance
- Financing, loans, interest
Many claim that overall soft costs in construction add up to no more than 10% of the job, but our research shows that it is close to 25% – 30% in reality. Home owners or inexperienced builders tend to forget some of the costs and miscalculate the costs.
Follow our guide for construction soft costs and learn how to estimate new home or large renovation projects.
Breakdown of all Soft Construction Costs
Let’s go a little more in-depth and understand each expense that we call soft cost. Most of these occur before home builder, and only some go throughout the job until the very end. Of course all expense can be higher or lower in different cities. Jobs that are more compels and higher end obviously cost more.
- Architectural Drawings – Building new house without architectural drawings is not only illegal in construction but also irrational. There are options to save on soft costs by purchasing existing architectural drawings instead of making completely new design. But that would not be custom home anymore.
If you want to go extra step, designers can make 3d rendering of each room for interior. We recommend budgeting 2%-3% of costs to drawings and design.
- City Permits and Other Fees – There tons of fees and expenses that go to approval authorities. For the most it consists of permit fees, but some regions have additional registration applications that add up as well.
There is no accurate math equation that can relate to every city and state for permit fees. Every place is different, but the costs should not go above 1% of building costs.
- Construction Reports and Studies – To approve construction of new home, building authorities look at supporting documents. Besides drawings with engineering details construction process depends on things like lot size, positioning of house, dangers to environment, condition of soil.
All construction reports are attached together with architectural drawings and sent to city for approval. They sum up to 1%-2% of overall expenses.
- Builder and Management Fees – Each builder or general contractor has to be paid. Companies have staff, supervisors and personnel that is paid to build house. Competent project managers work hard on planning new home construction, check quality of work and make sure clients are satisfied with products they get.
From our experience and knowledge we can average our builder fees and management expenses to 7%.
- Profits, Expenses, marketing – Companies that build homes work and expand with idea of profiting on each project. Builders have ongoing expenses and marketing that has to be covered through jobs they take on for clients. This should not be confused with builder fees. Profiting, expending and covering marketing costs is completely different from salaries.
Generally companies that construct custom homes need 8% to go towards expenses and profits.
- Insurance – To avoid unpleasant circumstances and disasters during home build that can cause complete shut down, we recommend always getting insurance for work being done and property separately. This expense is not as high as other examples we stated in the list, but most home owners forget about it while budget planning.
Combined insurances should never go above 1% of construction project expenses.
- Financing, loans & interest – This expense very much depends on financing of the job. We see tendency of financing part of the jobs more often than full projects. Nevertheless borrowing money for home construction and large renovation project is quite costly.
Remodel On Point team advises to assume costs for financing and loans around 5%-7% as construction soft cost percentage.
Difference between hard costs and soft costs in Construction
To sum it all up, hard costs in construction cover everything related to physical work or as we say labour with necessary construction materials and finishes for the house. Soft costs in constructions cover indirect expenses to actual building. These are legal fees, management, fees, financing and other expenses for documents required in home construction.
Unlike hard costs and physical work, list of soft costs in construction are less understood by clients or home owners. Unfortunately nowadays to build a house expenses go through the roof due to bylaw requirements. Experienced builder are transparent about budgeting for home constructions from beginning to end.
Additionally we want to underline that builder company fees are just a fraction of overall soft costs, and most of it goes towards architecture, city fees and many other things. Home owners should be more educated on where they spend money during construction.
Construction Soft Cost Percentage Builders Charge
Most home owners are surprised to see soft costs to be so high and ask builders to explain what is included. We wanted to prepare everyone who plans to build new custom home and adequately calculate expenses. One of the biggest mistakes in large construction projects is to underestimate or under budget the job.
Remodel On Point stats show that construction soft cost percentage is on average 27% of the entire project. Always assume to spend more than everyone tells you. Unfortunately this number is quite high. Just think about it for a minute. Budgeting one million dollars for new home construction and spending only $730 000 for labour and materials.
There is a big debate if profits are to be included in construction for companies. The reason for that is many people build houses on their own without hiring builder company. When you build on your own, the soft costs are much lower because there is no profit and overheads are tiny. Ask our team to help you understand more about list of soft costs in construction when working without builder.
