What Are Hard Costs?

What is a Hard Cost?

Hard costs are expenses directly incurred to complete the construction of a project. These expenses are linked to tangible expenditures associated with the building structure, the construction site, and the landscape such as wood, cement, carpet, drywall, utilities, HVAC systems, pavement, grass and trees. In addition to physical material, hard costs also assume the expense of labor used to complete the project.

Why Are Hard Costs Important?

Hard costs are difficult to estimate as economic factors such as rising labor and material prices can increase project cost.

Hence hard costs are important to accurately forecast because they make up a significant amount of a construction budget, about 70%, and can impact a tenant’s rental rate, overall return on investment, as well as the developers decision to proceed with the project or not.

How Are Hard Costs Used in Real Estate?

When an investor is determining whether to take on a new investment opportunity, he/she makes sure to analyze the construction budget thoroughly.

Construction costs significantly impact ROI, so it is important for all parties to understand the outflows of expenses during this period before moving forward with the project.

Typically, because soft costs can’t be as accurately measured, investors use hard costs instead to determine the general cost of the project completion. Then, they use hard costs to decide whether they’d wish to proceed with the investment.

Hard Costs vs. Soft Costs

Soft costs are all intangible expenses not directly related to the construction of the property. These costs include legal fees, permit fees, engineering fees, project management fees, architectural fees, etc. Typically, soft costs represent 15-30% of the total construction budget.

Soft costs also include expenses that continue after project completion such as building maintenance, insurance, security, and other fees associated with upkeep of the property.

The main difference between soft costs and hard costs is that hard costs end at delivery, whereas soft costs can continue after completion of the project.

Conclusion

Hard costs are immediately incurred upon construction and make up a major portion of the construction budget. Hence, they are important to accurately factor in as they can determine whether a project is feasible or not. If your construction budget is too high, that might indicate you need to reevaluate how you are allocating funds between your hard and soft construction costs. The more accurate your cost estimate is, the lesser the risk of all parties involved.

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About the Author

Eric Bergin is the founder of TSM. He realized that there was a need for real estate financial models that were more than just generic templates. He wanted to create a personalized product for his customers that would ensure success for them and their company. Please reach out to him if you have any questions on hard costs or if he can help you with your modeling needs.