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CHAPTER 6. MARKUPS AND INSTALLATION COST ANALYSIS

TABLE OF CONTENTS

6.1 INTRODUCTION ............................................................................................................6-1

6.2 OVERVIEW OF MARKUP EQUATIONS .....................................................................6-1

6.3 ESTIMATION OF INSTALLED PRICE ........................................................................6-2

6.3.1 Estimation of Pole Replacement Costs .............................................................................6-3

6.3.2 Impact of Increased Distribution Transformer Weight on Installation Costs ..................6-4

6.3.3 Estimation of Markups .....................................................................................................6-5

6.3.4 Dry-Type Distribution Transformer Installed Price Equation ..........................................6-6

6.3.5 Liquid-Immersed Distribution Transformer Installed Price Equation .............................6-7
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CHAPTER 6. MARKUPS AND INSTALLATION COST ANALYSIS

6.1 INTRODUCTION

This chapter of the technical support document (TSD) presents the U.S. Department of 

Energy’s (DOE's) method for deriving distribution transformer prices. The objective of the 

equipment price determination is to estimate the price paid by the customer or purchaser for an 

installed distribution transformer. Purchase price and installation cost are necessary inputs to the 

life-cycle cost (LCC) and payback period (PBP) analyses. Chapter 8 presents the LCC 

calculations, and section 8.2.1 describes how the LCC uses purchase price and installation cost 

as inputs. 

Purchase prices for distribution transformers are not generally known. Distribution 

transformers are specialty items, often custom-built with unlisted prices. The engineering 

analysis (Chapter 5) provided the manufacturer selling prices for the units included in the LCC 

analysis. DOE derived a set of prices for each distribution transformer design produced by the 

engineering analysis by applying markups to the manufacturer selling price in the form of 

markup equations. These markups represent all the costs associated with bringing a 

manufactured distribution transformer into service as an installed piece of electrical equipment at 

a customer’s site. 

6.2 OVERVIEW OF MARKUP EQUATIONS

Depending on the purchasing environment, DOE used different markup equations to 

capture the various markups in the supply chain between the manufacturer and the customer. For 

example, electric utilities (except for the rural electric cooperatives) typically purchase liquidimmersed distribution transformers through manufacturer representatives or distributors. The 

manufacturer selling price plus the distributor markup is generally the utilities’ price for 

transformers. Dry-type distribution transformers go through several additional marketing or 

handling steps before they are installed by the end-use purchaser.

 In general, liquid-immersed distribution transformers have a seven percent markup, 

accounting for distributor markup.1 This markup is eliminated for a fraction of cases to account 

for liquid-immersed distribution transformer sales that are from manufacturers directly to 

utilities. The fraction of cases, as determined by the amount of electricity reportedly sold by 

investor owned utilities IOUs in the U.S. Energy Information Administration (EIA) Form 861, is 

82 percent. 

 The manufacturer selling prices for dry-type distribution transformers generally include 

two price markups: a distributor markup of 15 percent and 26 percent for low- and mediumvoltage dry-type distribution transformers respectively, and a contractor materials markup of 10 

percent and 16 percent for low- and medium-voltage dry-type transformers respectively. DOE 

based these markups (expressed as average multipliers) on RS Means Electrical Cost Data 
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Online 20112 and input from interested parties respectively for low- and medium-voltage drytype distribution transformers. The distributor markup converts the manufacturer selling price to 

the distributor price and the price paid by the electrical contractor. This distributor markup 

covers the costs of the distribution business, including sales labor, warehousing, overhead, and 

profit. Then the contractor applies a markup to the distributor selling price to cover contractor 

overhead and profit. 

For both liquid-immersed and dry-type distribution transformers, DOE added sales tax, 

an installation labor and equipment markup, and installation costs. In the previous distribution 

transformer rulemaking DOE analyzed shipping costs as one of the markups used to determine 

installed equipment price. In this Preliminary Analysis the markups for shipping costs have been 

moved into the engineering analysis and are described in greater detail in chapter 5. Using RS 

Means Electrical Cost Data Online 2011

6.3 ESTIMATION OF INSTALLED PRICE

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(RS Means) DOE estimated a contractor markup of 

1.10, which is used to convert the distributor selling price to a contractor price. Then the 

installation cost is added as the cost of labor, equipment, and materials (other than the 

transformer itself) needed to install a distribution transformer. Finally, by weighting the sales tax 

for each individual State by its population, DOE calculated a national weighted average sales tax 

of 6.9 percent.

3

 DOE developed several empirical equations for estimating installation costs by 

following these steps mentioned above. 

In order to estimate the installed price for distribution transformers, DOE applied the 

following equation that describes the steps in the distribution channel for transformers: 

Installed Price = Mtax × {ML&E × L&E + MMat × [MDist × ManPrice]}

Where:

Installed_Price = the final installed price of the transformer (2011$),

Mtax = the factor that accounts for sales tax, estimated to be 1.069,3

ML&E = the factor that accounts for the markup on direct installation labor 

and equipment costs, 

L&E = the installation, direct labor, and equipment costs (2011$), adjusted

to 2011$ using the gross domestic product (GDP) price deflator 

from the U.S. Bureau of Economic Analysis (BEA).4

MMat = the factor that accounts for the contractor markup on the purchase 

of the transformer from the distributor, 

MDist = the average distributor markup factor, and 

ManPrice = the manufacturer's selling price (2011$). 
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DOE estimated markups for distribution transformers by fitting a linear cost function to 

the RS Means electrical cost data (see section 6.3.3). The RS Means data break down the total 

installed cost for transformers in terms of four cost components: 

1. materials: the unit material cost, which includes mounting hardware, but not overhead or 

profit; 

2. labor: labor cost required for installation, including unloading, uncrating, hauling within 

200 feet of the loading dock, setting in place, connecting to the distribution network, and 

testing; 

3. equipment: equipment rentals necessary for completion of the installation; and

4. overhead and profit (O&P): installation overhead and profit expenses for the contractor 

(for dry-type transformers only).

RS Means lists the first three cost components separately and then has an additional 

column listing the total costs including O&P. As defined by RS Means

6.3.1 Estimation of Pole Replacement Costs

, this figure is the sum of 

the (1) bare material cost plus 10 percent for profit, (2) bare labor cost plus total overhead and 

profit, and (3) bare equipment cost plus 10 percent for profit.

DOE evaluated various design options and efficiency levels for distribution transformers, 

and the potential impact of each on the utility or performance of this equipment. Interested 

parties commented to DOE that a more efficient pole-mounted transformer may weigh more as a 

result of its additional core and winding materials and, consequently, be too heavy for mounting 

on an existing pole, hence less utility. In view of cost data provided by interested parties, DOE 

estimated the additional cost to install a heavier single-phase, liquid-immersed transformer on an 

upgraded pole that would bear the increased weight of the more efficient transformer. 

 In view of the above, DOE included a pole-replacement cost function as a part of the 

installation cost equation for design line 2 (DL2), and DL3, which cover pole-mounted 

distribution transformers. In general, as transformers are redesigned to reach higher efficiency

levels, the weight and size also increase. The degree of weight increase depends on how the 

design is modified to improve efficiency. For pole-mounted transformers, represented by DLs 2 

and 3, the increased weight may lead to situations where the pole needs to be replaced to support 

the additional weight of the transformer. This in turn leads to an increase in the installation cost. 

To account for this effect in the analysis, two steps are needed:

 The first step is to determine whether the pole needs to be changed. This depends on the 

weight of the transformer in the base case compared to the weight of the transformer under a 

proposed efficiency level, and on assumptions about the load-bearing capacity of the pole. In the 

LCC calculation, it is assumed that a pole change-out will only be necessary if the weight 

increase is larger than 15 percent of the base case and is also 150 pounds heavier of the weight of 

the baseline unit for a DL 2 (25 kVA) unit; to determine the weight-change threshold for DL 3 
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(500kVA) units the 150 pounds was scaled using the 0.75 scaling rule to 1,418 pounds. DOE 

understands that most utility poles are made of wood. Both the American National Standards 

Institute (ANSI) and National Electrical Safety Code (NESC) provide guidelines on how to 

estimate the strength of a utility pole based on the tree species, pole circumference, and other 

factors, such as climatic region. Natural variability in wood growth leads to a high degree of 

variability in strength values across a given pole class. Thus, NESC also provides guidelines on 

reliability, which result in an acceptable probability that a given pole will exceed the minimal 

required design strength. Because poles are sized to cope with large wind stresses and potential 

accumulation of snow and ice, this results in “over-sizing” of the pole relative to the load by a 

factor of two to four. In some marginal cases utilities also have the option to reinforce pole or 

structures with guy wires instead of outright pole replacement. Because of this over-sizing and 

the availability of other supporting options, DOE limited the total fraction of pole replacements 

to 25 percent of the total population. 

 The second step is to determine the cost of a pole replacement. This typically involves 

removal of the old pole and its disposal, erection of the replacement pole, and the transferring of 

all attached equipment and concessions. DOE used labor and equipment cost estimates from the 

RS Means

6.3.2 Impact of Increased Distribution Transformer Weight on Installation Costs 

, to construct a range of possible costs that would be seen by a utility when performing 

a pole replacement . Based on this information, a triangular distribution was used to estimate 

pole change-out costs. For DL 2, DOE used a lower limit at $2,025 and an upper limit at $5,999 

to estimate the range of pole replacement costs. For DL 3, DOE used a lower limit of $5,877 and 

an upper limit of $13,274 for pole replacement. For multi-pole (platform) replacement, DOE 

used a lower limit of $5,877 and an upper limit of $16,899. In all, 70 percent of DL 3

replacements were estimated multi-pole or platforms. DOE understands that a utility pole has a 

finite lifetime, so pole change-out due to increased transformer weight should be counted as an 

early replacement of the pole, i.e., it is not necessarily correct to attribute the full cost of pole 

replacement to the transformer purchase. Equivalently, if a pole is changed-out when a 

transformer is replaced, it will have a longer lifetime relative to the pole it replaces, which offsets 

some of the cost of the pole installation. To account for this effect, pole installation costs are 

multiplied by a factor n/pole-lifetime, which approximately represents the value of the additional 

years of life for the pole. The parameter n is chosen from a flat distribution between 1 and the 

pole lifetime, which is assumed to be 30 years. 

DOE derived the weight-versus-capacity relationship for a typical distribution 

transformer from the design data produced by the engineering analysis in the TSD. It used the 

weight-versus-capacity relationship to estimate the transformer weight corresponding to the 

transformer costs reported in RS Means. DOE estimated a scaling relationship between 

transformer weight, and direct installation labor and equipment costs by fitting the correlation 

between weight and installation costs to a power-law equation. 

The method for deriving the weight-versus-capacity relationship uses a typical 

transformer weight from the engineering analysis. DOE defined the typical weight as the 

minimum weight plus 20 percent times the weight range, where the weight range is the 
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difference between the minimum and maximum transformer weight for the selected design. 

From these data, DOE obtained the following power-law relationship for 

transformer weight as a function of capacity and basic impulse insulation level (BIL) 

rating:

Weight = 17.31 × kVA0.52 × BIL0.44

Where:

Weight = the weight of the transformer (pounds),

kVA = the capacity of the transformer (kVA), and 

BIL = the BIL rating of the transformer (kV).

Although RS Means does not provide transformer weights, it does provide 

transformer capacity and primary voltage. DOE estimated weight from capacity and BIL, 

which it estimated using primary voltage. DOE then compared the weight to the direct 

installation costs from the labor and equipment to obtain a power-law relationship.

The following regression performed was the installation direct labor and equipment 

costs as a function of transformer weight. Data analyzed included all 67 distribution 

transformer kVA ratings spanning the three RS Means

L&E = 38.69 × Weight0.53

electrical equipment categories: 

“dry-type transformer”, “oil-filled transformer”, and “transformer, liquid-filled”. The 

resulting correlation equation is:

Where:

L&E = the installation, direct labor, and equipment costs (2011$), 

Weight = the weight of the transformer (pounds).

6.3.3 Estimation of Markups 

DOE performed a linear regression analysis to disaggregate the overhead and profit 

associated with installation labor and equipment rental from the overhead and profit associated 

with the transformer (material) cost. The regression equation is:

Total Costs Including O&P = α + β × Mat + γ × L&E

Where:

Total Costs Including O&P = the sum of all bare costs plus overhead and profit expense 

(2011$),

Mat = the material cost (transformer and hardware) (2011$), and 
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L&E = the direct labor and equipment costs of installation

(2011$).

In this linear regression, α is the constant; β and γ are the variable slopes for material 

costs and direct labor and equipment costs respectively. After running the regression above, 

DOE found that the estimated coefficient for the constant term is not significantly different from 

zero. Therefore, DOE reran the regression without the constant term. The resulting equation is: 

Total Costs Including O&P = 1.10 × Mat + 1.47 × L&E

The interpretation of the coefficient of material costs is that when material costs increase 

$1, then the total costs including O&P should be expected to increase $1.10 while holding the 

other variables constant. Likewise, a $1 increase in the direct labor and equipment costs will lead 

to a $1.47 increase in the total costs including O&P while holding the other variable constant. 

These two figures were used to allocate overhead and profit expenses to a markup on the price of 

the distribution transformer and a separate markup on the direct labor and equipment costs for 

the installation.

6.3.4 Dry-Type Distribution Transformer Installed Price Equation

 For dry-type distribution transformers, the result of these analytical steps is a total 

installed cost equation as a function of the manufacturer selling price, and direct labor and 

equipment costs, using those markups estimated in section 6.3.3: 

Installed Price = Mtax × {ML&E × L&E + MMat × [MDist × ManPrice]}

Where:

Installed_Price = the final installed price of the transformer (2011$),

Mtax = the factor that accounts for sales tax, estimated as 1.069,

ML&E = the factor that accounts for the markup on direct installation labor 

and equipment costs, estimated as 1.47, 

L&E = the installation, direct labor, and equipment costs (2011$), adjusted 

to 2011$ using the GDP price deflator from BEA, 

MMat = the factor that accounts for the contractor markup on the purchase 

of the transformer from the distributor, estimated as 1.10 for lowvoltage dry-type and 1.16 for medium-voltage dry-type, 

MDist = the average distributor markup factor, estimated as 1.151 for lowvoltage dry-type, and 1.26 for medium-voltage dry-type, and

ManPrice = the manufacturer's selling price (2011$).

DOE applied the installed cost equation by using the manufacturer selling price and 

weight (in pounds) from the engineering analysis. For example, according to the engineering 
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analysis, a DL8 (low-voltage, three-phase, 750 kVA) transformer model with $1,698.55 of L&E 

costs listed in RS Means has a minimum manufacturer selling price of $4,235.47. For this 

particular transformer, DOE estimated the lower bound of the installed cost to be $8,396.72, 

where $2,669.15 is the installation cost and $5,727.57 is the sum of the transformer retail price, 

sales tax, and markups. 

6.3.5 Liquid-Immersed Distribution Transformer Installed Price Equation

The installed price calculation for liquid-immersed distribution transformers differs from 

that for dry-type distribution transformers in that the distributor markup used in the equation is 

1.07 instead of 1.15, and DOE removed the contractor markup from the equation based on the 

previous rulemaking.1 DOE added a new distribution channel to represent the direct sale of 

distribution transformers to utilities, which account for approximately 81 percent of liquidimmersed transformer shipments. The fraction of utilities that purchase directly from 

manufacturers is based on the percent of electricity sales by independently owned utilities in the 

EIA’s Form 861[2] database. This sales channel removes a distributor markup. The inclusion of 

this channel reduces the overall markup for liquid-immersed transformers.

Installed Price = Mtax × {ML&E × L&E + [MDist × ManPrice]}

Where:

Installed_Price = the final installed price of the transformer (2011$),

Mtax = the factor that accounts for sales tax, estimated as 1.069,

ML&E = the factor that accounts for the markup on direct installation labor 

and equipment costs, estimated as 1.47, 

L&E = the installation, direct labor, and equipment costs (2011$), adjusted 

to 2011$ using the GDP price deflator from BEA, 

MDist = the average distributor markup factor, estimated as 1.07, and 

ManPrice = the manufacturer's selling price (2011$).

As with the dry-type distribution transformers, DOE applied the installed cost equation 

by using the manufacturer selling price and weight from the engineering analysis. For example, 

according to the engineering analysis, a DL4 (medium-voltage, three-phase, 225 kVA) 

transformer model with $2,309.64 of L&E costs listed in RS Means has a minimum manufacturer 

price of $5,305.36. For this particular transformer, DOE estimated the lower bound of the 

installed cost to be $9,697.87, where $3,629.44 is the installation cost and $6,068.43 is the sum 

of the transformer retail price, sales tax, and markups. 
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REFERENCES

1. Department of Energy - Office of Energy Efficiency and Renewable Energy Energy 

Conservation Program for Commercial Equipment: Distribution Transformers Energy 

Conservation Standards; Proposed Rule. Federal Register 71, No. 150, 44373 (2006). 

2. RSMeans Electrical Cost Data Online. Electrical Cost Data Online (2011).at 

<http://rsmeans.reedconstructiondata.com/66003.aspx> 

3. The Sales Tax Clearinghouse State Sales Tax Rates. theSTC - State Sales Tax Rates at 

<http://www.thestc.com/STrates.stm>

4. U.S. Department of Commerce-Bureau of Economic Analysis National Economic Accounts: 

National Income and Product Accounts Tables (1969-Present). at 

<http://www.bea.gov/national/nipaweb/DownSS2.asp> 

5. ANOPR for Distribution Transformers, EE-RM/STD-00-550, RIN #1904-AB08, comment 

No. 63. (2004).