Sometimes referred to as indirect costs, soft costs are business costs that are not involved in the direct process of a business operation. While essential, these types of costs generally focus on ancillary issues that do not affect the day to day production process. A few examples of soft costs include expenses related to the sales and marketing effort, taxes due to different tax agencies, and any fees or insurance premiums that the business pays to its providers.
Within the construction industry, soft costs are understood to be just about any expense that is not directly connected with labor or the costs or materials used in the construction effort. This would include expenses like premiums on builder’s risk insurance plans, interest charges that are connected with any financing done to manage the overall costs of the construction itself, and even the fees charged by architects. It is not unusual for the costs of any overtime put in by workers to also be considered indirect costs, since the expense is considered outside the scope of the budgeted amount set aside for wages to hourly employees.
Just about any type of company will have some type of indirect or soft costs involved with the operation. At the very least, the company will have taxes to pay and is also likely to require legal or other types of support services from time to time. Maintenance of some type of liability coverage is a soft cost that even local businesses such as lawn care services or plumbers will incur as part of the ongoing process of doing business. The costs of preparing and printing sales collateral is also a common example of indirect costs that most businesses will experience. All those charges would be considered indirect costs since they do not impact the core operation or production effort of the business.
Just as businesses need to monitor direct or hard costs and do what they can to keep labor and materials costs within reason, it is also important to manage indirect costs to best advantage. Doing so often means monitoring finished goods inventories to make sure that the taxes on those inventories is kept as low as possible while still maintaining an inventory sufficient to meet customer orders. Along the same lines, companies will seek to secure different services with the most cost-efficient fee schedules possible, a move that helps to further keep soft costs in line.