Hard Costs vs Soft Costs in Construction: A Developer's Breakdown

Soft costs are the non-construction expenses of a project: design and engineering fees, permits, impact fees, studies and financing. Harvard's Joint Center for Housing Studies, citing Brookings, reports they average roughly 20-30% of total costs on a straightforward multifamily project. Hard costs vs soft costs construction budgets differ mainly in who controls each line.

This article is part of our construction cost estimating guide, which explains how these budget categories connect to the estimate.

What are hard costs in construction?

Hard costs are the direct costs of physically building the project. They include labor, materials, equipment, subcontractor work, the contractor's general conditions (on-site management and support costs), and the contractor's overhead and profit. In most budgets they also include site work such as grading, utilities and paving.

Fannie Mae's multifamily commentary, citing 2019 RSMeans data, treats contractor fees (overhead and profit) as part of construction cost and puts them at about 25% of total construction costs for 4-7 story buildings. Treat it as an approximate benchmark. The point is structural: when you see a contractor's price, it already contains the contractor's margin, and you should not add it again.

Hard costs are the figure that cost-per-square-foot benchmarks usually describe. Our guide to cost per square foot in construction explains why that number alone never equals the project budget.

What are soft costs in construction?

Soft costs are everything required to deliver the building that is not the physical construction. Typical items include:

• design and engineering fees (architect, structural, MEP, civil, landscape);
• permits and plan-review fees;
• impact fees charged by local governments;
• required studies (geotechnical, environmental, traffic, surveys);
• legal, insurance and developer fees;
• financing costs, such as loan fees and construction-period interest;
• owner's representative or project management fees;
• furniture, fixtures and equipment in many budgets.

Some of these are fixed regardless of project size. Others scale with the hard cost. Definitions vary by source: some studies count land and financing as soft costs, while others show them separately. Always write down what your budget includes before you compare it with a benchmark.

What are financing costs, and are they a third category?

Many developers divide the budget into hard costs, soft costs and financing costs, because financing behaves differently. It depends on the loan amount, the interest rate, the draw schedule and, above all, the duration. A month of delay adds a month of interest, whether or not a single additional dollar goes into the building.

The financing line is also where the other two interact. A hard-cost overrun increases the loan balance, and a schedule slip in design or permitting extends the interest period. For the broader developer view, see our article on soft costs in the construction budget.

What percentage of a project is hard costs vs soft costs?

The published evidence is thinner than most websites suggest, so use ranges and name the source.

These do not add up to one clean split, because the studies define the categories differently. An aggregator guide offers a hard/soft/land split of 37/24/19, but its authority is low, so we do not rely on it.

A practical approach: start with a range of 20-30% of total cost for soft costs on conventional multifamily, then replace it line by line as you get fee proposals, a permit-fee schedule from your jurisdiction and a loan term sheet. If your project is affordable housing, a high-regulation metro or a complex building type, assume the share is higher until proven otherwise.

How do hard and soft costs combine in a budget?

Illustrative example: a developer plans a 120-unit multifamily building. The assumptions below are invented to show the arithmetic and are not market data.

Here the non-hard-cost items (excluding contingency) sum to $8.64 million, about 18% of the $47.52 million total, or 24% of hard costs. If the developer had budgeted only the $36 million hard cost plus contingency, the shortfall would have been about $8.6 million.

The design contingency in the example reflects AIA's guidance that design contingency is usually 5-10% of construction cost. See construction contingency by phase for how to size it.

When do soft costs hit the budget?

Soft costs do not arrive evenly. Mapping them to project phases helps you forecast cash and spot gaps.

Notice that the largest single risk sits in the middle two rows. Fees and requirements discovered during permitting are hard to avoid, and by that time the design is paid for and the schedule is running.

The same discipline applies to the hard-cost side. An owner who keeps the two buckets in separate columns of one budget can see how a change in one moves the other, and can show a lender or board a complete picture rather than a construction price alone.

Why does underbudgeting soft costs cause trouble?

Soft costs get missed for three reasons. They are spread across many parties and invoices. Early budgets often start from a hard-cost price per square foot. And several lines grow after the budget is set.

• Delay compounds. Permitting or design delays extend the loan period and carrying costs.
• Fees scale. Many design fees are percentages of construction cost, so hard-cost growth lifts them.
• Requirements appear. Studies, special inspections and utility upgrades often surface during review.
• Lenders require equity. A budget that leaves out soft costs understates the capital stack and can strain the equity commitment.

The consequence arrives late. By the time a soft-cost gap is visible, construction is underway and the owner cannot cut scope without a redesign. A reasonable owner treats the soft-cost estimate with the same discipline as the hard-cost estimate, including contingency.

Where do contingency and land fit?

Two items cause the most category arguments. Land is usually shown on its own line, outside both hard and soft costs, because it is purchased rather than built. Contingency should also be visible on its own line, not buried inside either bucket, so that you can see how much is left as design progresses.

Many owners carry a contingency against hard costs (design and construction risk) and a smaller one against soft costs (fee growth, extra studies, delay). Whichever you choose, label it and name who can release it. A budget with hidden reserves is hard to defend with a lender and harder to manage when change orders arrive.

How can an owner control soft costs?

• Fix the scope early. Late program changes drive redesign fees.
• Get written fee proposals from architects and engineers with defined services, instead of relying on a percentage rule.
• Obtain the jurisdiction's fee schedule for permits and impact fees at the start.
• Order studies early so findings do not arrive after drawings.
• Track the schedule against the financing term; each month of delay has a cost.
• Reconcile the full budget against the contractor's line-by-line budget at every milestone.

One caveat applies here: the percentages in this article are published benchmarks from limited sources, and soft-cost shares differ sharply by market, building type and funding source. Build your own figures from project-specific proposals and fee schedules.