Soft Costs: What They Are and Why You Should Always Include Them

What are soft costs?

Soft costs are project expenses that aren’t directly tied to physical construction or tangible deliverables. They include professional fees, permits, insurance, financing, and project management — everything that makes the project possible but doesn’t show up as a physical output.

In construction, the distinction is clear: bricks and labor are hard costs; architect fees and permits are soft costs. In service businesses, the line blurs — but the concept still applies. Any cost that supports the project without being a direct deliverable is a soft cost.

Soft costs typically account for 15–30% of total project cost. Ignore them in your quote and you’re giving away a significant chunk of your margin.

Soft costs vs. hard costs

	Hard Costs	Soft Costs
Definition	Direct, tangible expenses tied to physical output	Indirect expenses that support the project
Also called	Direct costs, construction costs	Indirect costs, project costs, non-construction costs
Examples	Materials, labor, equipment, subcontractors	Design fees, permits, insurance, financing, PM
Predictability	Easier to estimate — based on quantities	Harder to estimate — often percentage-based or time-based
Timing	Mostly during execution phase	Before, during, and after execution
Typical share of budget	60–80%	15–30%

Examples of soft costs

Soft costs vary by industry, but these categories appear in most project budgets:

Professional fees

• Architecture & design — design concepts, technical drawings, specifications
• Engineering — structural, mechanical, electrical consulting
• Legal — contracts, zoning review, dispute resolution
• Accounting — project accounting, tax advisory, auditing

Permits & approvals

• Building permits — municipal or county approval fees
• Environmental assessments — impact studies, soil testing
• Inspections — code compliance, safety certifications
• Zoning & land use — variance applications, rezoning fees

Project management

• PM labor — scheduling, coordination, reporting
• Communication — client meetings, status updates, documentation
• Quality assurance — testing, review cycles, punch lists
• Change management — processing scope changes, re-estimating

Financing

• Interest on construction loans — carrying costs during the build
• Loan origination fees — points, processing charges
• Payment processing — transaction fees on client payments

Other

• Insurance — builder’s risk, general liability, professional indemnity
• Taxes — sales tax on materials, property tax during construction
• Marketing & leasing — pre-sale or pre-lease costs (for developers)
• Contingency — a reserve for unforeseen soft cost overruns

How to include soft costs in your quote

The biggest mistake is treating soft costs as “the client’s problem.” If you’re managing the project, soft costs are your responsibility to estimate and communicate.

• List them explicitly. Don’t lump them into a vague “overhead” line. Break them into categories: professional fees, permits, PM, insurance. Transparency builds trust.
• Use percentage benchmarks. If you don’t have exact numbers, use industry averages. Architecture fees are typically 8–15% of construction cost. PM is 5–10%. Insurance is 1–3%.
• Account for timing. Many soft costs occur before or after the main work — design fees upfront, inspections at the end. Build them into your cash flow plan, not just the total budget.
• Add contingency on soft costs too. Permit delays, additional review rounds, and scope changes all inflate soft costs. A 10% buffer on the soft cost budget is reasonable. See Contingency Budget for the formula.
• Review your overhead rate. Some soft costs are project-specific; others are part of your general overhead. Make sure you’re not double-counting. See Business Overhead for how to separate them.

The goal isn’t to surprise the client with extra costs — it’s to present a complete, honest budget from the start. Projects that include soft costs upfront have fewer disputes, fewer change orders, and healthier margins.