Hard Costs vs. Soft Costs for Multifamily Construction
Learn the crucial difference between hard and soft construction costs in multifamily development and how they impact profitability. Read our expert guide now.
- Hard and Soft Construction Costs in Multifamily Development
- Defining Hard Costs in Multifamily and Commercial Construction
- Construction Labor and Materials
- Landscaping Costs
- Site Improvements
- Utility Installation
- Interior Finishes
- HVAC
- Life Safety Systems
- Defining Soft Costs in Multifamily and Commercial Construction
- How LEED Certifications Relate to Hard and Soft Construction Costs
- Hard and Soft Costs and Construction Cost Estimates
- Putting Hard and Soft Construction Costs Into Perspective
- Calculate Your Construction Costs
- Related Questions
- Get Financing
Hard and Soft Construction Costs in Multifamily Development
When it comes to investing in multifamily and commercial development projects, understanding and analyzing construction costs is key. Construction costs, which have been rising steadily for the last decade, have a significant impact on the overall profitability of an investment.
They can generally be divided into two categories: hard costs and soft costs. Hard costs are those associated with physical building construction, while soft costs are intangible, and are typically associated with the planning, permitting, and financing of a construction project.
Understanding the difference between soft costs vs. hard costs can make it much easier to accurately project the actual cost of your development.
Defining Hard Costs in Multifamily and Commercial Construction
Hard costs, which may also be called “tangible costs” or “brick and mortar costs,” include all costs involved with physical building construction, with the exception of land acquisition and demolition costs, which are classified as site work expenses. Hard costs can include many different items, detailed below.
Construction Labor and Materials
Wages for workers physically doing work on the property, and purchase costs for all relevant materials, including concrete, wood, steel, insulation, glass windows, and more.
Landscaping Costs
Typically includes costs for trees, grass, mulch, fertilizer, flowers, bushes, and any other landscaping elements.
Site Improvements
Paving/walkways, gazebos, permanent/fixed benches/outdoor furniture, and other exterior improvements.
Utility Installation
Electrical installation, plumbing, water/sewer hook up, etc.
Interior Finishes
Wallpaper, paint, trim, flooring, etc.
HVAC
Full installation of heating, ventilation, and air conditioning systems.
Life Safety Systems
Fire alarm systems, sprinkler systems, fire escapes, and other related systems.
Hard costs can vary, but they are often more expensive in areas with colder climates, as buildings may require additional insulation and slightly different designs to accommodate potential snow and ice. Contingencies are also required. At the final estimation, these usually come out to around 5% to 10% of total costs for new construction or between 15% and 20% for renovations.
Defining Soft Costs in Multifamily and Commercial Construction
Soft construction costs are all costs that do not involve the physical construction or alteration of the property. Some of the most common examples of soft costs include:
Architectural, planning, and engineering fees
Legal fees, permits, and taxes, property and construction insurance
Multifamily construction loan application fees/origination fees, interest payments, and other related financing fees
Moveable furniture and building equipment (i.e. lawn chairs, fire extinguishers)
Initial Cost Estimate: The cost estimation process often begins with an estimate that’s between 30% and 50% accurate.
Preliminary Budget Estimate: In this stage of the process, an initial budget is created, which should generally be between 15% and 30% accurate. Contingency levels now generally hover around 20%.
Preliminary Budget Estimate: At this point, which usually occurs when the building design is at least 70% or 80% complete, a professional estimator is brought in, who will re-work and refine the construction budget, bringing accuracy to between 5% and 15%.
Final Budget: As finished building plans and signed contracts are issued to the estimator, they can begin to fully lock in a finalized construction budget. At this point, the budget should be within a 5% accuracy level. Theoretical contingency is now at between 0% and 5%, but, in practice, a 5% to 10% contingency will still be accounted for (or 15% to 20% for renovations) in order to compensate for unexpected expenses.
What are the differences between hard and soft construction costs?
Hard costs are those associated with physical building construction, such as materials, labor, and equipment. Soft costs are intangible, and are typically associated with the planning, permitting, and financing of a construction project. For example, soft costs may include architectural fees, legal fees, and loan origination fees.
It's important for multifamily developers and investors to understand how construction costs are calculated, as it can help them maximize the profitability of their investments. For more information, please visit Multifamily.loans.
What are the advantages and disadvantages of hard construction costs?
The advantages of hard construction costs are that they are tangible and can be easily tracked and monitored. This makes it easier to budget for and manage the costs associated with a construction project. Additionally, hard costs are typically more predictable than soft costs, as they are based on the actual materials and labor used in the construction process.
The disadvantages of hard construction costs are that they can be more expensive than soft costs, as they are based on the actual materials and labor used in the construction process. Additionally, hard costs can be difficult to estimate accurately, as they are subject to market fluctuations and other external factors.
What are the advantages and disadvantages of soft construction costs?
The advantages of soft construction costs are that they can help reduce the amount of materials used to construct a building, and spending more on soft costs now can also reduce future soft costs. For example, making sure to hire high quality legal counsel can reduce the chance that a development will incur additional legal fees or permitting expenses down the line.
The disadvantages of soft construction costs are that they can be difficult to accurately estimate, and can often be higher than expected. Additionally, soft costs can be difficult to finance, as they are not tangible assets. For this reason, many developers opt to finance soft costs through a multifamily construction loan, which can provide the necessary capital to cover these costs.
What are the most common hard construction costs for multifamily developers?
The most common hard construction costs for multifamily developers include construction labor and materials, landscaping costs, site improvements, utility installation, interior finishes, HVAC, and life safety systems. Construction labor and materials typically include wages for workers physically doing work on the property, and purchase costs for all relevant materials, including concrete, wood, steel, insulation, glass windows, and more. Landscaping costs typically include costs for trees, grass, mulch, fertilizer, flowers, bushes, and any other landscaping elements. Site improvements typically include paving/walkways, gazebos, permanent/fixed benches/outdoor furniture, and other exterior improvements. Utility installation typically includes electrical installation, plumbing, water/sewer hook up, etc. Interior finishes typically include wallpaper, paint, trim, flooring, etc. HVAC typically includes full installation of heating, ventilation, and air conditioning systems. Life safety systems typically include fire alarm systems, sprinkler systems, fire escapes, and other related systems. Contingencies are also required; at the final estimation, these usually come out to around 5-10% of total costs (for new construction), or between 15-20% (for renovations).
Source: Hard vs. Soft Construction Costs for Multifamily Developers
What are the most common soft construction costs for multifamily developers?
The most common soft construction costs for multifamily developers include architectural, planning, and engineering fees; legal fees, permits, and taxes; property and construction insurance; multifamily construction loan application fees/origination fees, interest payments, and other related financing fees; moveable furniture and building equipment; lease-up costs; marketing expenses; security; and building maintenance.
How can multifamily developers reduce their hard and soft construction costs?
Multifamily developers can reduce their hard and soft construction costs by taking a few steps. First, they should shop around for the best financing options. This could include researching different lenders and loan products, such as bridge loans, construction loans, and permanent loans. They should also compare interest rates and terms to ensure they are getting the best deal. Second, they should look for ways to reduce the cost of materials and labor. This could include negotiating with contractors, subcontractors, and suppliers, or looking for ways to reduce the amount of materials needed. Finally, they should look for ways to streamline the permitting process, such as working with local governments to expedite the process.
For more information, please see Hard vs. Soft Construction Costs for Multifamily Developers.
Depending on how construction costs are calculated, some expenses that are incurred after building completion may also count as soft costs, including lease-up costs and marketing expenses, security, building maintenance, and other, similar costs. In general, soft costs can be seen to directly impact hard costs.
For instance, having an effective architect and engineer can help reduce the amount of materials used to construct a building. Plus, spending more on soft costs now can also reduce future soft costs. For example, making sure to hire high quality legal counsel can reduce the chance that a development will incur additional legal fees or permitting expenses down the line.
How LEED Certifications Relate to Hard and Soft Construction Costs
Leadership in Energy and Environmental Design, or LEED, is perhaps the world’s most popular certification for sustainable buildings. LEED-certification is typically classified as a soft cost, like architectural planning and building inspection costs. Despite this, LEED requirements may lead to a building using more expensive construction materials-- generally adding about 2% to the hard costs of a development project. While they can cost substantially more upfront, LEED-certified buildings can save a significant amount of energy and can often quality for tax credits and other benefits. Plus, they can enhance the marketability of a multifamily development, particularly for upscale properties in major MSAs.
Hard and Soft Costs and Construction Cost Estimates
Since construction costs are so essential to the overall profitability of a development, the construction cost estimation process generally begins many months, if not years, before a building actually breaks ground. Construction cost estimates typically go through several stages, including:
Rough estimates can be made by developers and contractors by using pre-built spreadsheets and other tools, but nearly all large commercial projects will hire professional construction cost estimators, which will use engineering expertise and mathematical skills to develop the most accurate numbers possible.
The only real question is when to bring in the estimator — at the beginning, middle, or end of the planning process. In many cases, it can be worth it to bring them in earlier. While this can cost more upfront, it can save developers significant time and money later on in the development process.
Putting Hard and Soft Construction Costs Into Perspective
With multifamily construction costs on the rise, it’s never been more important for multifamily developers and investors to understand how construction costs are calculated. Otherwise, they could make costly mistakes, such as not getting a sufficiently-sized construction loan or overpaying during the commercial construction or architectural bid process. Like everything else in commercial real estate, knowledge is power, and those who understand more stand the best chance of maximizing the profitability of their investments.
Calculate Your Construction Costs
Use our calculator to get an admittedly rough estimation of construction costs for a multifamily property. This calculator will not factor in location or many of the soft costs, but it may provide you with a great starting point.