Written bySoft costs are the indirect expenses of a construction project: professional fees, approvals, finance and marketing costs that support delivery but are not built into the fabric.
Also known as: indirect costs, soft cost
Key points
- They are indirect and usually not permanently incorporated into the finished asset, unlike hard costs such as labour, materials and plant.
- Timing is uneven: many land before construction starts, others at handover, and interest accrues right through the build.
- They shape funding requirements and lender assessments, and they create cashflow pressure early in a project.
- Poorly scoped soft costs are a common source of disputes, variations and contract claims.
- Budget them separately from hard costs and give them their own contingency, so the two are not double counted.
What soft costs cover
Before construction: design and consultant fees for architects and engineers, feasibility studies and site surveys, planning applications and statutory fees, legal and conveyancing work, insurance arrangement and brokerage, and finance establishment fees. During construction: project management, site administration and temporary services, testing and commissioning planning, safety compliance documentation and statutory inspections.
At handover: marketing, sales and leasing commissions, defects liability administration, final certification and operational handover training. Running underneath all of it are the holding costs: rates and taxes during development, site security and temporary utilities, professional indemnity cover, and the interest that accrues on funds as each drawdown is made.
Soft costs against hard costs
Hard costs are the tangible construction spend: labour, materials, plant and subcontract works, incorporated into the finished asset and usually estimated from quantities and rates. Soft costs sit around that work and are usually priced as fixed fees, lump sums or a percentage of total development cost.
The split matters in contracts. Under a lump sum contract, contractors typically exclude owner side soft costs, so any disbursement they do carry has to be listed and any variation needs a valuation method. Under cost plus, soft costs are often passed through as reviewed disbursements, which lowers contractor risk but widens the owner's cost range. Termination clauses should spell out who wears outstanding consultant fees.
Insurance and tax treatment
Soft cost cover, usually sold as delay in start up, pays additional standing costs and lost income where an insured peril delays completion. Purely contractual delays and labour disputes are normally excluded, waiting periods apply, and the sum insured for soft costs is often separate from the physical damage cover. Insurers want contemporaneous invoices and project schedules that show what caused the delay.
For tax, costs directly attributable to acquiring or constructing a capital asset are capitalised and may attract capital works deductions or depreciation, while day to day operating costs are expensed. Soft cost invoices for taxable supplies attract GST, and input tax credits may be claimable where the purchase is for a creditable purpose. Keep a separate ledger and get project specific advice from your accountant.
Example
On a $10 million mid-rise development, soft costs might run to $1.5 million, or 15% of total development cost. Inside that line: design and consultants $450,000, approvals and statutory fees $100,000, project management and site administration $300,000, finance and interest during construction $450,000, and marketing, sales and leasing $200,000. A soft cost contingency sits on top at 10% of that $1.5 million, or $150,000, kept separate from the hard cost contingency. Finance is a material line in its own right, so model it from the lender's terms and the drawdown profile rather than guessing a percentage.
Not to be confused with
- Capital expenditure (CapEx)
- capital expenditure is the spend that creates the asset, while soft costs are the indirect spend around it, much of which is capitalised into that same asset
- Soft asset
- a soft asset is an asset with little resale value once installed, not an indirect project expense
Frequently asked questions
Are finance costs a soft cost?
Yes. Interest during acquisition and construction, establishment fees and bank charges all sit in the soft cost column, and on a development they can be one of the largest lines. Model them separately from the fee based soft costs, using the drawdown profile for the build.
Do soft costs attract GST?
Invoices for taxable supplies generally do. Where the expense relates to a creditable purpose, the owner may be entitled to claim input tax credits. How the contract is structured affects the timing of those credits, so check the ATO guidance or ask your accountant.
Can soft costs be capitalised for tax purposes?
Some can. Costs directly attributable to constructing a capital asset may be capitalised, and depending on the nature of the expense they can attract capital works deductions or depreciation on plant and equipment. Recurrent operating costs are expensed instead. Classification is worth taking advice on.
What is soft cost insurance?
Often sold as delay in start up cover, it pays additional standing costs and lost income when an insured event delays completion. Waiting periods, indemnity periods and the sum insured vary between policies, and insurers expect documentation linking the extra cost to the insured event.
How much contingency should I allow for soft costs?
A soft cost contingency of roughly 10 to 20% of the estimated soft costs is typical, and more for novel or complex projects. Keep it separate from the hard cost contingency so the two are not double counted, and document the reasoning behind the figure.
Related terms
Construction loan
A construction loan is a loan that pays for building work in stages, releasing funds as a new home, rebuild, extension or commercial development reaches each milestone.
Read definitionCapital expenditure (CapEx)
Capital expenditure (CapEx) is money a business spends to buy or improve fixed assets such as buildings, plant and vehicles, rather than on day-to-day running costs.
Read definitionFees
Fees are the explicit charges a provider applies for a financial product or service, separate from interest and covering access, administration or transactions.
Read definitionInsurance
Insurance is a contract where you pay a premium and an insurer covers specified losses, such as damage to a financed asset or a lender's loss on default.
Read definitionDepreciation
Depreciation is the fall in an asset's value over time, spread across the years the asset is used so the cost can be claimed as a tax deduction.
Read definitionGoods and services tax (GST)
Goods and services tax (GST) is a broad-based 10% tax on most goods and services sold in Australia, which registered businesses collect on sales and pay to the ATO.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.