Soft costs are indirect expenses that are not directly related to labor or materials used in business operations. Examples include sales and marketing expenses, taxes, commissions, insurance premiums, and fees charged by architects. It is important to manage indirect costs by monitoring inventories and securing services at the cheapest rates possible.
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 typically focus on incidental issues that don’t impact the day-to-day production process. Some examples of soft costs include expenses related to sales and marketing effort, taxes owed to various tax agencies, and any commissions or insurance premiums that the company pays to its suppliers.
In the construction industry, soft costs are understood to be any expense not directly related to labor or costs or materials used in the construction effort. This would include expenses such as premiums on builder’s risk insurance plans, interest charges connected with any financing made to handle the overall costs of the construction itself, and even fees charged by architects. It is not uncommon for any overtime costs incurred by workers to be considered indirect costs as well, as the expense is considered to be outside the scope of the expected wage rate for hourly employees.
Almost every type of business will have some kind of indirect or soft costs involved in the operation. At the very least, the company will have taxes to pay and is also likely to require legal or other services from time to time. Maintaining some type of liability coverage is a small cost that even local businesses like lawn care services or plumbers will incur as part of the ongoing process of doing business. The costs of preparing and printing sales guarantees are also a common example of indirect costs that most businesses will experience. All these expenses would be considered indirect costs since they do not affect the core business or production effort of the firm.
Just as companies need to monitor direct or hard costs and do what they can to keep labor and material costs within reason, it’s also important to manage indirect costs well. Doing so often means monitoring inventories of finished goods to make sure taxes on those inventories are kept as low as possible while still maintaining enough inventory to fulfill customer orders. Along the same lines, companies will try to secure different services at the cheapest rates possible, a move that further helps keep costs soft in line.
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