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CHAPTER 6. MARKUPS FOR EQUIPMENT PRICE DETERMINATION

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 Transformer Pole Costs............................................................................. 6-3

6.3.2 Estimation of Markups..................................................................................................... 6-3

6.3.3 Dry-Type Transformer Installed Price Equation ............................................................. 6-4

6.3.4 Liquid-Immersed Transformer Installed Price Equation ................................................. 6-5
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CHAPTER 6. MARKUPS FOR EQUIPMENT PRICE DETERMINATION

6.1 INTRODUCTION

This chapter of the technical support document (TSD) presents DOE's method for 

deriving transformer prices. The objective of the equipment price determination is to estimate 

the price paid by the customer or purchaser for an installed 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; 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. 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 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 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 transformers through manufacturer representatives or distributors. The manufacturer 

selling price plus the distributor markup is generally the utilities’ price for transformers. Drytype transformers go through several additional marketing or handling steps before they are 

installed by the end-use purchaser.

Liquid-type distribution transformers have a seven percent markup, accounting for 

distributor markup.1 The manufacturer selling prices for dry-type transformers include two price 

markups: a distributor markup of 15 percent and a contractor materials markup of 10 percent. 

DOE based these markups (expressed as average multipliers) on RS Means Electrical Cost Data 

2010.

2 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 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 
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into the engineering analysis; this is described in greater detail in chapter 5. Using RS Means 

Electrical Cost Data 2010, 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. 

6.3 ESTIMATION OF INSTALLED PRICE

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

following equation, which describes the steps in the distribution channel of transformers: 

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

where:

Installed_Price = the final installed price of the transformer (2010$),

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 (2009$), adjusted

to 2010$ 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 (2010$).

DOE estimated markups on transformers by fitting a linear cost function to the RS Means

electrical cost data (see section 6.3.2). 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;
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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, this figure is the sum of 

the bare material cost plus 10 percent for profit; the bare labor cost plus total overhead and 

profit; and the bare equipment cost plus 10 percent for profit.

6.3.1 Estimation of Transformer Pole Costs

In evaluating design options and the impact of potential standard levels, DOE examined 

the potential for new standards for distribution transformers to lessen the utility or performance 

of these products. Stakeholders mentioned in their comments to DOE that the more efficient 

transformers that are heavier could have lessened utility due to impacts on utility pole 

requirements for overhead transformers. DOE estimated the additional installation costs, based 

on cost data provided by stakeholders, to mount the single-phase, pole-mounted, liquidimmersed transformers whose designs would require an upgrade to the pole due to increased 

transformer weight. 

DOE included a pole-replacement cost function as a part of the installation cost equation 

for DL2, which covers pole-mounted transformers. Because not all transformer installations 

require a change-out of existing equipment even in the most extreme case, DOE assumed a 

maximum change-out fraction. DOE selected 25 percent as the maximum change-out fraction 

estimate based on stakeholder input.5 This analysis assumed that a pole change-out cost of 

$2,000 occurs for up to 25 percent of pole-mounted transformers when the weight of the 

transformer exceeds 1,000 pounds.1 DOE also included a transformer pole support cost of 

$0.12/lb to account for the cost of a sturdier pole. The pole cost equation is included in the LCC 

spreadsheet tool for DL2 so that stakeholders can conduct sensitivity analyses regarding pole 

replacement costs.

6.3.2 Estimation of Markups

DOE performed a regression 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 

(2009$),

Mat = the material cost (transformer and hardware) (2009$), and
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L&E = the direct labor and equipment costs of installation

(2009$).

For use in the LCC analysis, DOE adjusted these 2009$ to 2010$ using the GDP price 

deflator from the BEA.

4

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 + 1.43 × 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 variable constant. Likewise, a $1 increase in the direct labor and equipment costs will lead 

to a $1.43 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 

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

installation.

6.3.3 Dry-Type Transformer Installed Price Equation

For dry-type 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 6.3.2:

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

where:

Installed_Price = the final installed price of the transformer (2010$),

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 1.43,

L&E = the installation, direct labor, and equipment costs (2009$), adjusted 

to 2010$ 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,

MDist = the average distributor markup factor, estimated as 1.151, and

ManPrice = the manufacturer's selling price (2010$).

DOE applied the installed cost equation by using the manufacturer price and weight from 

the engineering analysis. For example, according to the engineering analysis, a DL8 (lowvoltage, three-phase, 750 kVA) transformer model with $3,455 of L&E costs listed in RS Means
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has a minimum manufacturer price of $4,235.47. For this particular transformer, DOE estimated 

the lower bound of the installed cost to be $11,009.12, where $5,281.56 is the installation cost 

and $5,727.56 is the sum of the transformer retail price, sales tax, and markups.

6.3.4 Liquid-Immersed Transformer Installed Price Equation

The installed price calculation for liquid-immersed transformers differs from that for drytype 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

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

where:

Installed_Price = the final installed price of the transformer (2010$),

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 1.43,

L&E = the installation, direct labor, and equipment costs (2009$), adjusted 

to 2010$ using the GDP price deflator from BEA,

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

ManPrice = the manufacturer's selling price (2010$).

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

manufacturer 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 

$2,001 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 $9,127.30, 

where $3,058.87 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. Electrical Cost Data: 33th Annual Edition. (RS Means Company Inc.: Kingston, MA, 

2010).at <http://rsmeans.reedconstructiondata.com/60030.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 U.S. Department of 

Commerce. Bureau of Economic Analysis. 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).