Commercial Construction Cost Breakdown: What You Need to Know

Do you invest more in your projects than you had actually thought? Do you want to know what all adds up to your final commercial construction cost? Well, you have landed at the right spot. Let’s get started!

What are Commercial Construction Costs?

Any cost-related construction for commercial, retail, or industrial purposes and multi-family residential development is referred to as commercial construction cost. It includes offices, medical spaces, schools, universities, malls, parking structures, etc.

Foreseeing commercial construction cost breakdown is the right way to begin your project. A better foresight early in the commercial construction cost breakdown can save you lots of time, energy and money later in the project.

Commercial construction costs vary from different locations and times. As a result, commercial buildout costs have become part of the renting process. For instance, modern-day tenants want their office spaces to reflect their brand and thus are built to enhance the productivity and morale of their employees.

If you look at the numbers, the commercial building construction business is on an upward trend. The US market offers more than 50 million square feet of commercial space for sale every year.

Commercial construction cost breakdown depends on several factors like- space, layout, functionality, office space aesthetics, and more. We’ll discuss these in detail in a moment.

You know we may at times ignore the commercial buildout costs, but they are a major determining factor for attracting and retaining your tenants. Want your tenants to stay longer in your property? Find out with us the components that make up and affect commercial construction costs. Compare the varying cost per square foot prices for different types of commercial buildings. Finally, learn how to protect your construction project from the damaging effects of global inflation.

Commercial Construction Costs

Commercial construction cost is never definite and is subject to change as per market conditions. However, we will help you to understand the variables that affect commercial construction cost breakdown. This way, you can make precise estimates and strategies to reduce your expenses.

Types of Commercial Construction Costs

Hard Costs: These costs are associated with the improvements to the commercial property and remain with you even when your tenant leaves the property. These are meant for permanent alterations and enhancements done to the property. It may amount to about 75 to 85% of commercial buildout costs.

Soft Costs: These are spent on obtaining services paid for the completion of the project. This will amount to 8 to 12% of the project’s total cost. These costs are often more difficult to project, including engineering, architectural design, permitting, insurance, taxes, etc. When not planned, these can push the project over budget.

Operational Costs: This refers to what it will cost to operate the building over its lifetime. Also referred to as life cycle cost analysis (LCCA), this measurement ensures that you achieve your ROI goals.

Vendor Costs: These are incurred towards signage, security, telephone, cabling for computers, and costs for moving into the property, and they may reach over 5 to 10% of the total commercial buildout costs.

Financing Costs: If you intend to finance your construction project, those costs are critical in your final decisions. There will be interest on your loan and any other associated costs.

Estimating Commercial Buildout Costs

In the office real estate market, commercial buildout is called the office “buildout ” or “fit-out”, which refers to finishing a raw commercial space into a ready-to-occupy office space. This involves modifying and customizing the spaces to suit the convenience of your businesses, your employees, and your customers.

The average cost per square foot is used to estimate the cost of constructing a commercial building. The initial rental negotiations between the tenant and the landlord determine the overall commercial build costs.

Tenants also contribute to the commercial buildout costs, and the average cost of building commercial improvements may come up to $65 per square foot with standard finishes.

Factors Affecting Commercial Office Buildout Costs

Here are some of the major factors that affect your commercial buildout costs. Understanding each of the following will assist you in evaluating what’s suitable for your project.

• Types of commercial buildings: Commercial projects could include office buildings, malls, medical office spaces, sports stadiums, hotels, and parking structures. The commercial buildout cost for parking structures is far less when compared to, say, lavish malls. Similarly, a two-storey building will cost less than a building with more floors.

• Class of building: Class A buildings with more than the average rent offer premium office space. Class B buildings have average rental charges for standard fitments and adequate systems. Class C buildings offer only functional spaces. There is no one size fits all formula to calculate the quantum of commercial buildout costs.

• Location: It is the main determining factor of the building cost of a commercial building. For instance, the northeast and eastern regions are expensive in the US, with high commercial buildout costs.

• Material: Primary material makes up most of the foundation of the projects. The quality and specifications of the material used add to the construction cost breakdown. Cement, for instance, is cheaper than steel.  

• Labour: Availability of labor and economic situation determines the labour costs. Workers expect more pay during the economic boom. While in times like the pandemic, they agree to work for low wages.

• Season: The rates for fuel, transport materials, the material cost may vary as per the season. It also affects the availability of labour and their pay.

• Finishes: These can quickly hike the budget of your project. The commercial general contractor must account for interior and exterior finishes while calculating the commercial construction cost breakdown. These include insulation, flooring, ornamentation, and other decorative elements.

• Electrical installations: The construction cost breakdown for interior lighting costs $3.3 per square foot, while display fixture millwork costs $10 per square foot, accounting for around 10% of the total project cost.

Other factors such as location, specific equipment demands, transportation facilities, and time are equally influential on commercial construction costs.

For instance, you will require expensive equipment in a noise-restricted area, like in the case of a nearby hospital or school. And, if the location has a high level of underground water, that will affect the construction layout and, eventually, your costs. Likewise, traffic jams can delay your planned construction and construction cost breakdown in urban areas.

Other factors like project complexity, competition from overseas companies, supply chain bottlenecks, and permits also affect commercial buildout costs.

Did you also know that the cost to build commercial medical spaces is rising year over year? It is because of a combination of these factors that we discussed. The buildout cost reached the highest level on record in the second quarter of 2018, rising 1.4% year-over-year to $22.90 per square foot.

The commercial buildout costs vary widely depending on factors in the market and those outside the market and come into play during the lease transaction.

Commercial Construction Costs Per Square Foot in San Francisco

BUILDING TYPE	COST PER SQUARE FOOT
Single story office	$364 – $437
Mid-Rise Office	$726 – $870
High-rise Office	$833 – $1001
Medical Office Buildings	$734 – $1018
Recreation/ Gymnasiums	$548  -$683
Museum/ Performing arts	$727 – $1272
Government administrative buildings	$521 – $844

Buildout Costs for Office Space

There is an ever-increasing concern for a better workplace environment and infrastructure. If you want to stand out, you will have to go beyond the apparent structure and offer more to your clients. This will definitely add up your commercial buildout costs and your reputation. You can refer to the breakdown of the estimated costs mentioned here:

Commercial buildout cost for basic office space comes to around $51 to $61, from $43 to $54 per square foot as per the 2018 standards. In the case of mid-range office space, the commercial buildout cost comes to $ 65 to $80, now from $57 to $75/square foot in 2018.

Likewise, the cost of building a commercial building fit-out for executive office space is $96 to $157 per square foot, which rose from $96 to $151/square foot in the range of prices in 2018. In the case of a first-generation space, you have to add $ 10 to the above rates.

The commercial buildout costs for furniture are $28 to $80/square foot, which was $20 To $70/square foot in 2018. The furniture costs were $28 to $30/square foot for basic office space, $30 to $40/square foot for mid-range office space, and $40 to $80/square foot for executive office space.

Fitness facilities have become an integral part of the commercial office space, and the commercial buildout cost for a fitness facility of about 10000 square feet stands at $155 To $210/square foot, which was $140 to $189/square foot in 2018.

The provision of a conference centre adds about $150 To $205/square foot which rose from $136 to $198/square foot in 2018 to the overall commercial construction cost breakdown. Additionally, an employee dining facility, kitchen, and serving room of around 5000 square feet available at $157 to $208/square foot in 2018 have risen to $162 to $241 per square foot.

Other basic commercial buildout costs include flooring costs estimated to be $2.76 per square foot, while the ceiling takes around $1.81 in a budget type construction. In addition, the HVAC systems installations or replacements need about $2.61 per square foot for a building of 5000 square feet space.

Payment Methods for Commercial Space Modifications

The commercial buildout costs tend to be lower for more extensive projects due to the lower per-unit material costs and discounts for bulk purchases. However, the ultimate cost of building a commercial building depends on many factors, including the lease rate, tenant allowances, and landlord concessions.

Most of the time, the landlords choose one of the following payment methods:

• Rent discounts: You can offer free or discounted rent for a certain number of months, and the tenant can utilize this amount for making the improvements.
• Building standard allowance: You can ask the tenant to select one among a set of the standard package of improvements, and he pays for them. The tenant must bear anything beyond the package chosen.
• Turnkey office buildout: You can deliver the tenant finished office space, ready to be occupied with everything they need to start their business based on specific agreements between you and your tenant.
• Tenant improvement allowance: Give the tenant payment or a discount on rent to carry out all the required improvement costs.

Some extra notes: the average cost of building out an office has increased by 12% in the past two years. At the same time, more than 60% of this increase in the commercial buildout costs is offset by enhanced rates of tenant improvement (TI) allowances; leading the tenants to bear the remaining 40% of the said increase.

Impact of Inflation on Commercial Construction Costs

Primarily, commercial construction costs are a sum of three elements: materials, labor, and margins. While margin profits vary across different sectors and locations, labor and material prices are facing unprecedented spikes since Covid-19. Several industry reports have predicted construction output to fall by a sharp 7% in 2023. “This reduction is worse than the previous estimate of 4.3% because growth is being hampered by high input costs, rising interest rates, inflation, and supply chain issues,” reveals Patrick Ryan, executive vice president for the Americas at Linesight.

Supply chain bottlenecks have led to a 20% rise in material prices between January 2021 and January 2022. While lumber, steel, and plywood costs were major concerns then, cement and cement products will have continued shortages this year. Similar market volatility can also be witnessed in commodities like appliances, mechanical and electrical equipment, oil/gas, piping, aluminum, stainless steel, nickel, etc.

Furthermore, tight labor conditions are encouraging labor unions to inflate job opening rates and labor wages, especially in markets with most construction activity. Escalation in nonresidential construction spending has resulted in more construction jobs and project backlogs, and hence, commercial contractors will increase their bid prices/profit margins too.

Overall, inflation has largely affected construction input prices which have translated into hiked-up bills for the commercial owners.

Best Practices for Commercial Owners to Control Costs

1. Stay on Schedule and within Budget

Completing building projects on time and within budget requires amending the usual workflow, as the demand for labor and materials is intense. Contractors should assemble the project team beforehand and utilize project management software to communicate plans quickly. Owners and developers should allot emergency contingencies of about 10% to 15% per year as budget buffers for cost overruns.

2. Early Contractor Involvement (ECI)

Strong preconstruction planning supported by Early Contractor Involvement (ECI) provides multiple cost savings to the owner. The building contractor, having in-depth knowledge of long lead times, material availability, and pricing can order essential items before time. Often, general contractors have well-established relationships with vendors, subcontractors, and suppliers which ensures smooth coordination and prevents expensive delays.

Some of the prominent forms of ECI are design-build (DB), progressive design-build (PDB), construction manager at risk (CMaR), and Alliance project delivery methods.

3. Technological Additions

Contractors can employ technological tools such as construction management software, drones, and light detection and ranging (LIDAR) to enable on-site tracking, data collection, and communication. Architects or designers can efficiently use Building Information Modeling (BIM) to regulate material configurations and adjust constructability according to supply chain availability. This way the GC can place orders early and prevent long lead times.

4. Use Alternative Materials

As an effect of the pandemic and the Ukraine-Russia War, inflation is hiking prices of all construction materials. Fortunately, alternative materials can serve the same design purpose and strength at less expensive prices. For example, timbercrete, ashcrete, ferrock, hempcrete, and rammed earth have lower costs than ready-mixed concrete. If possible, general contractors can opt for bolts over welding as the latter requires specialized material control and trained welders, which can add up to the final construction costs.

5. Modern Construction Methods

Today, commercial construction companies are employing modern methods of construction (MMC) including prefabrication, modular construction, precast flat panels system, 3D volumetric units, and many others to cut down their project costs. Given the fact that prefabricated and modular units are manufactured in a factory setting before being transported and assembled on-site, they reduce transportation costs, time, and waste pollution.

Conclusion

Don’t forget to add contingency towards the total estimated budget for unforeseen costs. The coronavirus pandemic is the epitome of why these costs are crucial while calculating the construction cost breakdown. It has severely affected the commercial construction cost and the overall construction industry. While adversities can knock on your door anytime, you must be prepared to handle them beforehand.

Remember that all the decisions you make at the onset of a project have a far more significant influence on your commercial construction cost than those made at later stages. By understanding and controlling these costs with effective forecasting and keeping their eye on the budget, you gain healthy profit when the project wraps up.

Get in Touch

If you have any requirements or queries regarding commercial construction cost estimation, we are more than qualified to help you.
Contact our team at Constructive Solutions, Inc. to get a quote today!

FAQs

How to calculate construction costs?

Cost of building = total area of construction x construction rate per square foot is the basic formula for calculating the development cost of a project.

What are some factors that inflate construction costs?

Factors like time of the year, economic growth, liquidated damages, material availability, labor wages, contractor’s bottom line, as well as type and complexity of the building project can inflate its construction costs.

How do I choose a commercial contractor?

Choose a commercial general contractor based on client reviews, ratings, portfolio and relevant experience in working on similar types of projects like yours. Check permits and documentation. Ask for detailed quotations.

Relevant Resources:

• Construction Budgeting: How To Stay on Track and Under Budget
• Commercial Construction Loan: The Only Guide You Need To Read