Soft Costs

Overhead and Profit

Every contractor has general costs of operating and maintaining a business in addition to specific costs related to a particular job, and is entitled to a profit from construction activities. The allowance included in the commercial base costs for normal general contractor and subcontractor overhead and profit (O & P) combined is 20%.

Overhead can be divided into two categories: general overhead costs and job-related overhead costs.

General

General overhead includes all costs that cannot be charged to a specific job such as office rent, office supplies, office equipment, utilities, advertising, and the salaries of personnel. These expenses must be paid regardless of the amount of contracted construction done.

Job-Related

Job-related overhead consists of costs that can be charged directly to the job at hand, but cannot be charged directly to labor or material costs. Job overhead includes temporary buildings, barricades, permits, surveys, and on-site utilities.

CoreLogic cost estimates include both types of overhead. State and local taxes, workers' compensation, unemployment compensation, bodily injury insurance, contractors' liability insurance, and Social Security have already been added to the labor costs and are not considered overhead in the system. CoreLogic cost estimates include consideration of normal profit for the location and property type. CoreLogic utilizes the normal profit concept to avoid overreacting to short term aberrations in construction markets. For example, strong demand can quickly drive up the profit component of total construction costs since builders are quick to react to market forces. However, markets are dynamic and these high profits are usually eroded by increased competition and return to normal levels. In depressed markets, profits can be squeezed and builders may accept marginal returns just to stay in business and hope for a return to better conditions.

Architectural Fees

When a building is designed, the services of architects and engineers are usually required. An architect designs structures utilizing technical and aesthetic abilities. Engineers apply their knowledge and skill to the structural integrity, and the effective layout and design of buildings. The engineer may call on an architect for aesthetic portions of the buildings. Architects and engineers are compensated for their services by fees that cover payroll, overhead, and expected profit. CoreLogic considers 7% architectural fees in its reconstruction cost estimates.

The architects' basic services, including standard engineering services, can be summarized in five phases:

Schematic Design

After discussion, the architect and the owner reach complete agreement on the project requirements. Drawings and other documents illustrating the building components and project scale are prepared, as well as an estimate of probable construction cost.

Design Development

Design development drawings and other documents that describe the size and characteristics of the materials for the entire project are prepared by the architect for the owner's approval. The estimate of probable construction cost is refined further.

Construction Documents

Detailed construction drawings and specifications are prepared by the architect for the owner's approval. The architect helps to prepare the form of agreement between owner and contractor.

Bidding or Negotiation

The architect assists the owner in obtaining bids and in preparing and awarding the construction contract.

Construction

During this phase, beginning with the award of the construction contract and ending with the final payment made to the contractor by the owner, the architect administers the construction contract.

The architect reviews and approves shop drawings, samples, and other information from the contractor to assure that they conform with the design concept and comply with contract documents.

The architect makes periodic visits to the site to become familiar with the progress and quality of the work, and to determine if the work is proceeding in accordance with the contract documents.

Contingencies

A contingency is an amount added to the final bid price of a construction project to cover unknown factors. This amount can range from 0 to 15 percent of the final bid price, or more. CoreLogic includes five percent in its replacement cost estimates for contingencies.

Examples of contingencies include:

If a contractor is unclear as to how something is to be built due to the degree of detail and completeness of the building drawings, a contingency is added to cover the unknown cost incurred when construction actually takes place. The vagueness of the bid drawings determines the percentage of the contingency.

The contractors' knowledge of local conditions is a contingency. Has he worked in the area before and established a practice in the locale? How reliable are the subcontractors that must be depended upon to do certain tasks? Will the contractor experience labor problems or a shortage of skilled workers? These unknown factors can affect the price of a construction project and are therefore included as part of the five percent contingency fee in the system.

Replacement costs are developed using normal conditions that one typically finds in constructing any building. When unusual conditions are encountered they must be considered as additions to the normal costs. Here are a few examples to be aware of and to adjust for: crime and vandalism protection, congested or constricted building site, economies of scale, environmental considerations, remote locations that increase transportation costs, weather conditions—heat, humidity, cold, and winds.

Impact Fees

An impact fee is a charge levied by a local governmental unit against new development to generate revenue. It is customarily used for the construction of new off-site capital facilities attributable to the development. CoreLogic does not consider impact fees in its replacement cost estimates because they represent a one-time charge against new construction and, therefore, do not affect replacement cost. The purpose of the fee is to generate incremental revenues that are, theoretically, to be used to offset the cost of the additional services needed by the new development. These services might include schools, parks, recreational facilities, fire and police protection, sewer and water capacities, roads, mass transportation, and other infrastructure.

Typically, impact fees are imposed up-front, usually at the time of building permit issuance. The fee is site-specific and based on a formula established by the local government. The formula calculation uses factors such as square footage of the building or a flat fee. Fees range from hundreds of dollars to hundreds of thousands of dollars.

The issue of impact fees is quite controversial. Builders feel that impact fees are unfair since the burden falls on new owners when the improvements financed by the fees benefit the entire community. Since the monies raised often have no direct relationship to the actual cost of the service, developers argue the fees are actually taxes in disguise. Builders point out that infrastructure across the country has been neglected for many years and feel that the mistakes of the past shouldn't be remedied with money from today's new development.

However, users are reminded to be aware of the potential of impact fees when evaluating new construction. Their effect on the total cost to build could be substantial and they should be considered as another soft cost or unusual influence.

Fast Track Construction

CoreLogic replacement cost information is based on standard construction practices where contract documents, specifications and drawings are complete before ground breaking begins. Fast track construction is a technique where construction begins before the building is completely designed and before contract documents are complete. This technique speeds up the construction process, but can cause construction costs to be 10 to 15% higher than standard construction.