Categories of Costs

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Construction costs are broken down into three categories

 

Direct costs
Indirect costs
Entrepreneurial profit

 

Direct costs or "hard costs" include expenditures for labor and materials used for construction of the structure.  Labor costs include the labor of employees who work on the structure, sub-contractors such as plumbers and electricians, and any general contractor who coordinates materials, employee labor, and sub-contractor labor.

 

Indirect costs or "soft costs" are expenditures for materials, supplies, and services other than the labor and materials that go directly into the house.  Indirect costs include financing costs, administrative costs, construction loan interest, selling expenses, professional fees, etc.  Indirect costs are often estimated as a percentage of the direct costs or selling price.

 

Entrepreneurial profit is part of the total cost of the endeavor and is included in any cost estimate.  Entrepreneurial profit is the selling price of the house less direct costs and indirect costs.

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