Summary: The accuracy of a cost estimate can make or break a commercial real estate development project. Finding the perfect partner will help your next construction project stay on budget and time. Let’s look at hard and soft expenses, examples of both, and how to estimate the entire cost of a development project.
Understanding some of the nuances of these cost breakdowns is crucial given the influence a thorough budget has on a commercial real estate development project’s success. You should be able to identify the factors on which your estimates are based in addition to the projected expenses for your project.
Let’s examine the terms “hard” and “soft” expenses, some real-world examples of both, and methods for calculating the overall cost of a development project.
Comparing Hard and Soft Costs
It’s crucial to remember that prices for commercial development projects often fall into two main categories: hard costs and soft costs.
Why Do Hard Costs Exist?
These expenses comprise the project’s tangible and quantifiable materials and components. Typically, this portion of the whole building expenditure makes up around 70%.
The following are examples of hard-cost items:
- The structure’s outer shell.
- parking
- additional paving
- site work
- landscaping
- HVAC units
- service technology
- security expenses
- construction work
- generating and backup power
Variable material and labor prices are one of the primary factors influencing estimates of hard costs. Furthermore, it may be more challenging to estimate hard costs due to varied project specifications. Better project estimates can be produced with the proper utilization of historical data, bids, and proposals. Contingencies must be considered to help pay for any unforeseen harsh cost changes.
What Do Soft Costs Mean?
Soft costs are expenses that aren’t immediately related to how the structure is made physically. They are made up of a variety of construction-related components. They have a significant impact on a project’s hard costs. Engineered and appropriately designed, a project’s hard expenses can be reduced.
The following are examples of soft expenses items:
- Costs for architecture
- engineering
- interior design
- civil engineering
- testing
- inspection
- environmental phase 1 study
- project management
- legal fees
Soft costs can also include ongoing costs for things like building maintenance, insurance, security, and other fees related to maintaining the asset.
A project’s soft costs can be reliably estimated with the support of the correct partners, appropriate historical data, bids, proposals, and so on.
Influence on a Project
Whether or not the prices fall into one of these two categories, maintaining construction costs requires a well-thought-out budget. Rent rates for tenants and other factors have an impact on the project’s overall return on investment. It’s critical to understand how hard and soft construction costs affect a project’s economic feasibility and to have a thorough understanding of both.
A Closer Look at Hard Costs in the Development of Commercial Real Estate
Let’s look more closely at what hard costs are and what goes into them when developing commercial real estate.
Common Construction Hard Cost Items
Building Shell
All materials needed to finish the entire construction or structure fall under this category. The foundation, framing, flooring, roof, finishing work, etc. make up the structure.
Additional Paving and Parking
This includes parking islands, curbs, asphalt, striping, and grading. Some of the work can fall under the “off-site improvement” category, including curb and gutter and a sidewalk for pedestrians. Deceleration/acceleration lanes for customers with higher traffic volumes may also be included.
Site Work and Landscaping
All subterranean utilities, water systems, drains, fire systems, and grading are examples of site work. When it comes to landscaping, these expenses entail planting grass, trees, shrubs, mulch, and other decorative elements.
Equipment for HVAC, Electrical, And Other Systems
These expenses cover the price of the HVAC systems, installation, cranes, and other installation-related supplies. Security and technology have prices. Lighting, technology, and security expenses, as well as phone and communication systems, are all examples of electrical and other equipment.
Construction Labor
Personnel costs must also be considered, along with the physical elements that make up a site’s interior and outside. This covers both general contractors and subcontractors, including plumbers, electricians, and carpenters, among other specialists.
Change Orders
These components may occasionally be listed independently or itemized under the building structure. These can range from labor expenses and market conditions to climatic variables and other unforeseen events.
Contingency
This cost is the sum set aside for unanticipated circumstances that might have an impact on the construction process. This money is kept in reserve and is not designated for any particular project.
How They Affect Your Development
Hard expenditures typically comprise around 70% of the whole building budget. It may be more challenging to predict hard costs when project specs vary. Furthermore, project hard costs may significantly rise due to shifting economic conditions such as growing labor and material expenses.
Ultimately, the total cost of construction affects variables like a tenant’s rental rate and the project’s overall return on investment. It’s crucial to understand how the hard construction expenses of a project will affect its economic feasibility and to have a thorough understanding of those costs.
A Closer Look at Soft Costs in the Development of Commercial Real Estate
Let’s examine the soft costs connected with the commercial real estate development process in greater detail as part of our “series” delineating commercial development costs.
Common Soft Cost Items for Construction
A list of some typical components for soft expenses in construction is provided below.
- fees for architecture
- Feasibility studies
- schematic designs
- design development
- construction documents
- project management
Fees for Engineers
Most projects will need several engineers to plan all of the project’s components thoroughly. Engineers with expertise in mechanical, plumbing, electrical, structural, and civil engineering will be hired to find potential problems and ensure the project is well-designed.
Fees for Plan Reviews
Fees for plan reviews are paid when a permit application and project plans are sent in for evaluation. In some circumstances, a supplemental plan review fee could also be imposed at the time a building permit is issued if the plan reviewer finds that the computed construction valuation is higher than the applicant’s disclosed estimate.
Permit fees
Commercial developers must also pay fees for any licenses obtained for new developments. The price of the permits can vary depending on the scope and complexity of your project, the cost of the work you’re doing, and any other permissions your project need.
Impact Fees
Municipalities levy impact fees to help cover the expenses of expanding infrastructure and public services due to new development. Usually, these are set up in growth regions that are specified by a city’s general plan.
Phase 1 of The Environmental Process, Soil Analysis, And Special Inspections
Testing and evaluating any environmental concerns connected to the land being developed are required. These tests may occasionally be followed by others that are more in-depth.
Studies On Traffic, Acoustics, Biology, Economy, And Archaeology
Many new projects will need a number of studies, depending on the location of intended development, to make sure there won’t be any negative effects on the neighborhood.
Title and Lender Fees
In almost all financial transactions, there is a fee of some kind. Guarantee costs, processing fees, documentation fees, project review fees, and fund control fees are some of the several charge types and amounts associated with construction loans. Legal costs will also be incurred for any necessary evaluations of lender loan documents and zoning documents.
Commission for Brokerage
These are the costs incurred by a broker when carrying out a property lease or acquisition. These commissions, if based on a percentage, can total up to 6% of a lease or purchase. In rare circumstances, they might also be billed at a flat rate.
How They Affect Your Development
About 30% of the budget for a development project is made up of soft charges.
In contrast to hard costs, soft costs can also include charges that persist even after a project is finished. This covers costs associated with the continuing maintenance of an asset, such as building and property maintenance, insurance, and security.
These expenses are not insignificant because they account for a sizeable portion of construction costs and, as was already mentioned, are crucial to making sure a project can be completed.
It can be challenging to calculate the total expenditures of a commercial real estate development project, and the accuracy of an estimate can significantly affect whether or not a project is feasible. Finding the ideal partner gives you the assurance you require to ensure that your upcoming construction project stays within your projected price and time frame.
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