Soft Costs vs Hard Costs in Construction: What Goes in Each Budget

By Erik Tishenko, Modern Northwest · Published November 4, 2026

Hard costs are the money spent on physically building: labor, materials, subcontractors, equipment, the mechanical, electrical and plumbing systems, and the finishes. Soft costs are everything else the project needs: design and engineering fees, permits and fees, legal, insurance and bonds, financing and project management. On a commercial build-out the contractor's price is mostly hard costs, while many soft costs land in the owner's own budget, which is why they are the ones that get missed.

How the construction guides we checked sort the common items. Some items, like general conditions, can land on either side depending on who is counting.

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Hard costs: what you can touch

The simplest test from the guides: if you can touch it or see it in the finished space, it is a hard cost. That covers the trades and their materials, from demolition and framing to the HVAC, wiring, plumbing, sprinklers and alarm, through the ceiling, flooring, paint and built-in casework. On a tenant build-out, almost all of this is inside the general contractor's price, billed against a schedule of values.

Soft costs: what makes the work possible

Soft costs pay for design, approvals, money and management. The architect and engineers are paid for the drawings, the city is paid for plan review and permits, attorneys review the lease and contract, the lender charges interest and fees, insurers and sureties are paid for coverage and bonds, and someone manages the whole thing. In Portland, a commercial build-out will most likely need separate electrical, mechanical and plumbing permits on top of the building permit, so permit costs come in several pieces.

Financing deserves its own line. Loan interest keeps accruing while the project runs, so a schedule slip raises soft costs even when the construction price does not move.

Where the line blurs

• General conditions. Site supervision, temporary utilities and cleanup are part of building, but some budgets file them as soft costs. On most contractor bids they sit inside the price. See our guide to general conditions.
• Furniture and equipment. Movable furniture, computers and phones are soft or a separate owner budget; built-in casework is hard.
• Design-build. Under design-build, design fees ride inside the builder's contract. They are still soft costs, just paid through one contract instead of two.
• Contingency. Many owners carry one reserve for construction surprises and a separate one for design and approval surprises. Our allowance vs contingency guide covers how they work.

Budgeting a tenant build-out

Start with the whole project, not just the construction bid. Put the contractor's price on one line, then list every soft cost you will pay directly: design, permits, legal review, furniture and IT, moving, and financing if you borrow. Check what the landlord's tenant improvement allowance can be spent on, including whether it can pay any of these soft costs. Our tenant improvement cost guide covers the construction side. More terms are in our commercial construction glossary.

Frequently asked questions

The bottom line

Hard costs build the space; soft costs design it, permit it, finance it and manage it. The construction contract mostly covers the first, so budget the second yourself, line by line, and keep a reserve for each.

From the 23,000 square foot Rite Aid conversion in Washougal to its design-build garden center, Modern Northwest has priced commercial work on both sides of the river since 2005. Bring us your budget.