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What Are Soft Costs?

Malcolm Tatum
Updated May 16, 2024
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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.

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Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
Discussion Comments
By everetra — On Jan 11, 2012

@David09 - That’s why you should never steal paper supplies from the office! But seriously, there are some soft costs that you can control.

You can choose to pay less expensive legal fees to other legal counsel (provided you don’t compromise on the quality of the service). You might be able to switch insurance providers or some of the other ancillary services needed to keep the business going.

It’s not easy, but when times are tough, you’ve got to examine every expense that impacts your bottom line.

By David09 — On Jan 10, 2012

@nony - I hate to agree with you on this point, but it’s true. It’s been said that one of the reasons America has been unable to compete on the manufacturing front has not only been the direct costs of manufacturing but also soft costs as well.

Consider the automotive industry. In other countries they don’t pay the same kinds of benefits we pay our workers. These are considered direct costs, but the article points out that overtime pay is a soft cost.

So that is an example of one area where our manufacturing has become more “expensive,” if you will, than that which is done by other nations.

Is it good or bad? Well, I certainly believe in treating our workers fairly, so I won’t say it’s bad. I do say it’s a challenge, however.

By nony — On Jan 09, 2012

In discussing soft costs vs hard costs, I think it’s clear that the soft costs are the kinds of expenses that creep up and really affect your bottom line.

After all, if you are making a widget, you know all the material and labor costs that go into making that widget. Those calculations should be straightforward.

The soft costs can come in from anywhere, and they may be harder to control. Taxes could rise, and this is clearly something that is beyond your control. Insurance premiums could rise as well for your employees.

Maybe we should call all of these additional costs the Total Cost of Ownership for making that widget. That’s why you need a really good accountant to track all of these ancillary costs in my opinion.

Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
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