What is the difference between hard costs and soft costs on a CRE construction loan budget?

Why the distinction matters for draws, contingency, and underwriting

The hard-cost vs. soft-cost split is the foundational categorization on a construction-loan budget. Hard costs typically run 70% to 80% of total project cost; soft costs the remaining 20% to 30% (higher on hospitality and complex urban projects, lower on simple multifamily walk-ups).

Hard costs fund against AIA G702 (application for payment) plus G703 (continuation sheet showing line-item percent complete), reviewed by the lender inspector on each draw. Conservative lenders require a third-party cost reviewer to validate percent-complete claims before each draw funds; lighter-touch lenders rely on the architect's or GC's certification.

Soft costs typically fund against actual invoices (lender legal, borrower legal, architect, engineer fees) or against pre-funded reserves (interest reserve, property tax reserve, insurance reserve, FF&E reserve). Some institutional construction loans pre-fund all soft-cost lines at closing; others fund monthly with the hard-cost draw.

Contingency is typically segregated by category: hard-cost contingency (5% to 10%) is the larger reserve and is more strictly controlled by the lender; soft-cost contingency (often 1% to 3% of soft costs, or sometimes carried as part of total contingency) absorbs invoice variability on architecture or legal lines. Mixing the two reserves limits the hard-cost cushion against construction overruns.