Construction Soft Costs: Types, Estimation, and Best Practices for Subcontractors

In the construction industry, managing costs properly keeps projects on track and profitable. 

While most subcontractors are familiar with hard costs—like materials and labor—construction soft costs can sometimes be overlooked or underestimated, leading to financial setbacks. Having a solid understanding and accurately estimating these non-physical expenses is essential to the overall success of a project.

In this article, we’ll break down what construction soft costs entail, share examples of soft costs in construction, and share practical advice for estimating construction soft costs. 

With this knowledge, subcontractors like you can manage project budgets more effectively and avoid unexpected financial pitfalls. Let’s look at why these soft costs matter and how to approach them accurately.

What are construction soft costs?

Construction soft costs refer to the indirect, non-physical expenses that are essential to a project’s completion but aren’t tied directly to building materials or on-site labor. 

Unlike hard costs—expenses directly associated with the physical construction, such as concrete and framing—soft costs encompass the behind-the-scenes aspects that support the overall project.

Common examples of soft costs in construction include:

• Permits and fees: The costs of obtaining the necessary approvals and licenses.
• Legal fees: Costs for services related to contracts, negotiations, and resolving disputes.
• Inspection and consulting: Professional assessments to ensure regulatory compliance.
• Design and architectural services: Architects, engineers, and designers fees for blueprints.
• Insurance: Premiums for project-specific coverage, such as liability or builder’s risk insurance.

As a subcontractor, managing these soft costs the right way maintains your budget and avoids unexpected financial issues. Conducting a thorough construction contract review helps highlight potential soft costs upfront, reducing the chance of disputes or delays. 

Superlegal’s construction contract review guide offers insights on streamlining contracts and minimizing unforeseen expenses and disputes.

Types and common examples of soft costs in construction

Recognizing the range of construction soft costs allows you to budget accurately. These costs are part of every phase, from pre-construction planning to post-construction services. Here are notable examples:

With some of these examples of soft costs in construction in mind, you can tackle projects with a more complete picture of expected expenses, which leads to clearer estimates and prevents budget overruns.

Estimating construction soft costs

Accurately estimating construction soft costs keeps subcontractors prepared throughout a project.

Create a detailed construction budget. The more detailed all potential construction soft costs are, the more precise and realistic the estimate will be. This process involves itemizing costs, such as breaking down consultant fees, permits, and insurance expenses—including buffers for any unexpected expenses.

Incorporate tech for better accuracy. Modern tools and technologies streamline the estimation process. E.g., adopting digital solutions like AI construction contract review software can highlight potential soft costs within contracts, flag overlooked expenses, and improve overall accuracy. Getting the most out of these technologies reduces the risk of missing budget items and makes forecasting efficient.

Leverage historical data. Records from previous projects are valuable when predicting soft costs in construction. Carefully reviewing and analyzing past experiences—both successful and challenging—can highlight certain expenditure patterns and guide adjustments tailored to specific projects.

Best practices for managing construction soft costs

Estimating construction soft costs effectively helps you avoid budget surprises and stay financially secure throughout a project. Consider some of these best practices to keep construction soft costs under control.

Use well-defined construction contracts

Having a well-crafted construction contract is a proactive way to outline potential soft costs right from the start. A detailed contract should include line items for various soft costs. When these costs are listed and agreed upon, the chance of disputes or hidden expenses later in the project is reduced. This proactive approach also prevents misunderstandings or contract disputes as the project progresses.

Conduct budget reviews and adopt tech

Consistent budget reviews are essential for addressing any deviations from planned expenses. Regularly tracking expenditures against the initial budget allows you to spot potential overruns. To streamline this, consider adopting technology that enhances cost tracking and analysis. Advanced software and AI construction contract review tools can identify hidden or overlooked costs and simplify budget revisions.

Address compliance-related risks

As long as you stay compliant with local regulations and industry standards, you minimize unexpected soft costs linked to legal issues. Think of penalties, or maybe required changes due to non-compliance. Handling construction legal risks upfront can keep you away from any costly penalties and delays. For further insights on reducing risks, check out Superlegal’s guide on construction legal risks with AI.

Stay proactive with contingency planning

Unexpected soft costs can emerge even with the best planning. Setting aside contingency funds in the budget is a smart approach to absorb any unforeseen expenses without disrupting the project’s cash flow. This cushion offers peace of mind and flexibility when adjustments are necessary, helping you navigate whatever obstacles come up without compromising the project timeline or financial health.

Impact of neglecting construction soft costs

Overlooking construction soft costs can lead to significant challenges that ripple through a project’s timeline and budget, ultimately threatening its success. These indirect expenses may seem minor compared to tangible hard costs, but their impact can be substantial if not accounted for properly.

Financial strains and budget overruns. When you underestimate or ignore soft costs, the risk of budget overruns increases. For example, failing to include adequate allowances for inspection services, consultant fees, or permit costs can lead to unanticipated expenses mid-project. These financial surprises sometimes force you to shift funds from other areas, delaying projects or compromising quality.

Delays and project setbacks. Soft costs like regulatory fees and consultations are often tied to critical project stages. If you overlook these costs, you’ll delay activities until you make adjustments. Delays end up extending the project timeline and result in either penalties or strained relationships with clients. These setbacks can derail even the most well-planned projects, adding unnecessary stress and pressure.

Fixed-price contracts and their implications. The fixed nature of lump sum contracts intensifies the impact of neglected soft costs, leaving little room for flexibility. In these agreements, a fixed price is set for the entire project, meaning you’re responsible for any unforeseen expenses. If soft costs haven’t been accurately estimated and included upfront, you may find yourself covering these expenses out of pocket.

Importance of cost planning. To mitigate the risks of neglecting construction soft costs, follow the basics of contract costing to delineate potential soft costs so they’re incorporated into the budget from the get-go. If you take enough time to methodically examine past projects, industry benchmarks, and project-specific details, you’ll build a budget that captures these often-overlooked expenses.

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A smarter approach to construction soft costs

Managing construction soft costs is as important as managing hard costs. These often-overlooked expenses can make or break a project’s financial health. Permits, consultant fees, insurance, and legal costs, soft costs encompass the less visible aspects of construction that are still critical to projects.

When you’re accurately estimating construction soft costs​, you can develop realistic budgets and allocate resources more efficiently. Adopting best practices such as using detailed contracts, conducting regular budget reviews, and integrating technology speeds up cost management while minimizing the risk of surprises. AI construction contract review software has the capability to enhance exactly these processes.

On the other hand, the consequences of neglecting construction soft costs are too significant to ignore. Unexpected expenses strain project budgets, cause delays, and affect the quality of work. Staying proactive and integrating cost planning into every phase—from pre-construction planning to post-construction services—is the way to go so you can keep projects on track and profitable.