Construction Project Accounting: What Developers Get Wrong About Soft Costs
- nadinepopova
- Jun 4
- 3 min read
For property developers, soft costs can be the silent budget killer—especially when misclassified, mismanaged, or underestimated. And while hard costs get the spotlight, it's often the soft costs that trigger financing issues, tax errors, and mid-project cash shortfalls.
In this guide, we unpack the biggest misconceptions Ontario developers have about soft costs—especially around capitalization and loan compliance—and show you how to track them correctly from day one.
What Are Soft Costs in Construction Project Accounting?
Soft costs are indirect expenses related to the design, planning, and administrative phases of a construction project. Unlike hard costs (materials and labour), soft costs are service-based and usually occur earlier—before financing is fully drawn.
Common Soft Cost Categories
Cost Type | Examples |
Professional Services | Architect, engineer, land surveyor, planning consultants |
Permitting & Legal | Site plan approvals, zoning applications, legal counsel |
Financing | Construction loan interest, origination fees, lender reports |
Insurance | Builders risk, liability insurance, bonding |
Admin & Overhead | Project management fees, software, bookkeeping, corporate allocations |
Marketing & Sales | Renderings, signage, commissions, staging |
What Developers Often Get Wrong
1. Failing to Capitalize Eligible Soft Costs
Many developers in Ontario expense soft costs immediately instead of capitalizing them as part of the building's cost base. This can result in:
Overstated expenses
Understated asset values
Lost opportunity for HST input tax credits
Confusion during loan reviews or audits
Capitalizable vs Expensable – Quick Comparison
Soft Cost Category | Capitalizable? | Notes |
Architect and Engineering Fees | ✅ Yes | Must relate directly to project design or build |
Loan Interest (during build) | ✅ Yes | Interest before completion is capitalizable |
Legal Zoning Applications | ✅ Yes | Related to land use approval = part of acquisition cost |
Admin Staff Costs | 🚫 Usually No | Unless directly attributable to project and well documented |
Office Supplies / Software | 🚫 No | General overhead not linked to construction is expensed |
⚠️ Capitalization also affects depreciation timing and cost base for resale.
2. Ignoring the Soft Cost Burn Rate
Soft costs often begin 6–18 months before a shovel hits the ground. Developers who don't forecast this accurately may find themselves overleveraged—or worse, delayed due to lack of liquidity.
Soft Cost Burn Rate Example: Mid-Rise Build in Ontario
Month | Est. Soft Costs (Cumulative) |
Month 1–3 | $55,000 (Legal, Planning) |
Month 4–6 | $90,000 (Design, Engineering) |
Month 7–9 | $30,000 (Permits, Insurance) |
Month 10–12 | $40,000 (Project Admin) |
Pre-con total | $215,000 before financing draw begins |
Mini-Case Study: One Ontario developer launched a 15-unit build with great projections—but forgot to forecast soft cost drawdown over the first 9 months. By Month 7, they had exhausted their equity and were forced to pause the project mid-zoning approval to seek additional bridge financing. Better soft cost forecasting could’ve prevented a 6-month delay and $22,000 in avoidable fees.
3. Not Structuring Books for Capital Recovery & Loan Compliance
Lenders often require detailed cost reporting that aligns with your loan draw schedule. If your soft costs are lumped into general “pre-con” buckets, you may face:
Delayed draws due to unsupported costs
Inability to track reimbursable vs non-reimbursable expenses
Complications during Quantity Surveyor or lender reviews
Ontario-Specific Practice:
Private and institutional lenders in Ontario typically:
Limit reimbursement for soft costs to specific line items
Require backup (invoices, contracts, or Quantity Surveyor confirmations)
Expect alignment with cost consultant or architect certifications
A well-maintained chart of accounts, with soft costs tagged by phase and purpose, makes this process seamless.
How to Track Soft Costs the Right Way
1. Use a Detailed Chart of Accounts
Structure your accounting system to reflect soft vs hard costs clearly.
Example Setup:
Account Code | Description |
5100 | Architect Fees (Soft) |
5110 | Zoning & Permitting (Soft) |
5120 | Legal Costs (Soft) |
5200 | Excavation (Hard) |
5210 | Framing (Hard) |
2. Use Classes, Projects, or Tags
In QuickBooks, Xero, or similar platforms, use tags or projects to track each development separately—and break it down by cost phase (pre-construction, construction, post-construction).
3. Align Bookkeeping with Draw Schedules
Work with your bookkeeper to reconcile soft costs monthly and match them to lender categories. This enables faster approvals, better visibility, and stronger lender relationships.
Free Download: Cost Tracking Template
Want a smarter way to plan and track your projects, including soft costs?
We’ve built a free Soft Cost Tracking Template, customized for Ontario developers.
Final Thoughts on Soft Costs
Soft costs aren’t just line items—they’re the foundation of your financial planning in construction project accounting. Treat them with the same discipline as your structural budget.
By understanding what to capitalize, how to forecast burn, and how to align with lender and CRA expectations, you can:
Improve project viability
Strengthen loan compliance
Make smarter investment decisions
Need help setting this up? Our team supports Ontario developers with project-specific bookkeeping, fractional CFO support, and lender-ready reporting systems.
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