CHAPTER 6. MARKUPS ANALYSIS

TABLE OF CONTENTS

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

6.2 DISTRIBUTION CHANNELS ....................................................................................... 6-1

6.3 MARKUP CALCULATION METHODOLOGY ........................................................... 6-4

6.3.1 Assumptions ......................................................................................................... 6-4

6.3.2 Baseline Markups................................................................................................. 6-5

6.3.3 Incremental Markups ........................................................................................... 6-6

6.4 NATIONAL WHOLESALE DISTRIBUTOR MARKUPS ............................................ 6-7

6.4.1 Markups for Wholesale Distributors of AC Equipment ...................................... 6-7

6.4.2 Markups for Wholesale Distributors of Prefabricated Wood and Metal Buildings

 6-8

6.4.3 Markups for Wholesale Distributors of Prefabricated Concrete Buildings ......... 6-9

6.5 PREFABRICATED BUILDING MANUFACTURER MARKUPS ............................ 6-10

6.5.1 Prefabricated Wood Building Manufacturer Markups ...................................... 6-10

6.5.2 Prefabricated Metal Building Manufacturer Markups ....................................... 6-12

6.5.3 Prefabricated Concrete Building Manufacturer Markups .................................. 6-12

6.6 NATIONAL MECHANICAL CONTRACTOR MARKUPS ....................................... 6-13

6.7 NATIONAL GENERAL CONTRACTOR MARKUPS ............................................... 6-14

6.8 REGIONAL EQUIPMENT WHOLESALER MARKUPS........................................... 6-15

6.9 REGIONAL CONTRACTOR MARKUPS ................................................................... 6-16

6.10 SALES TAX .................................................................................................................. 6-17

6.11 OVERALL MARKUPS................................................................................................. 6-17

REFERENCES .......................................................................................................................... 6-21

LIST OF TABLES

Table 6.4.1 Expenses and Markups for Air-Conditioning Equipment Wholesale 

Distributors .......................................................................................................... 6-7

Table 6.4.2 Expenses and Markups for Prefabricated Wood Building Wholesale 

Distributors .......................................................................................................... 6-9

Table 6.4.3 Expenses and Markups for Prefabricated Metal Building Wholesale 

Distributors .......................................................................................................... 6-9

Table 6.4.4 Expenses and Markups for Prefabricated Concrete Building Wholesale 

Distributors ........................................................................................................ 6-10

Table 6.5.1 Expenses and Markups for Prefabricated Wood Building Manufacturers ............. 6-11

Table 6.5.2 Expenses and Markups for Prefabricated Metal Building Manufacturers .............. 6-12

Table 6.5.3 Expenses and Markups for Prefabricated Concrete Building Manufacturers ......... 6-13

Table 6.6.1 Expenses and Markups for Mechanical Contractors .............................................. 6-14

Table 6.7.1 Expenses and Markups for General Contractors .................................................... 6-15

Table 6.11.1 Summary of National Average Overall Markups on SPVU Equipment .............. 6-20

LIST OF FIGURES

6-i 
Figure 6.2.1 Distribution Channels for SPVU Equipment .......................................................... 6-2

6-ii
CHAPTER 6. MARKUPS ANALYSIS

6.1 INTRODUCTION

One of the most important inputs to the life-cycle cost (LCC) and payback period (PBP) 

analysis and the national impact analysis is the projected installed cost of single package vertical 

unit (SPVU) equipment. Installed cost includes equipment purchase price and installation costs. 

The U.S. Department of Energy (DOE) projects the equipment purchase price by using 

multipliers called “markups” that are applied to the manufacturer production cost (MPC) to 

estimate the customer purchase price of the equipment. The SPVU manufacturer markup, 

projected as part of the engineering analysis, converts the MPC into manufacturer selling price 

(MSP). Distribution channel markups are then applied to the MSP based on how customers 

currently purchase the equipment. Distribution channel markups applied to MSP are the primary 

subject of this chapter. 

To carry out the analyses, the U.S. Department of Energy (DOE) needed to determine 

how the distribution channel expenses and markups will change in response to the incremental 

change in the MSP of more efficient units the customer would purchase following the 

promulgation of new energy conservation standards. To account for that DOE estimated a 

baseline markup and an incremental markup for each of the distribution channel segments. 

DOE defined a baseline markup as a multiplier that converts the MSP of equipment (the 

manufacturer or distributor price delivered to the work site) with baseline efficiency to the 

customer purchase price for the equipment at the same baseline efficiency level. An incremental 

markup is defined as the multiplier to convert the incremental increase in MSP of higher 

efficiency equipment to the customer purchase price for the same equipment. 

DOE also calculated weighted-average sales tax using the population of each state as the 

corresponding weight. DOE applied weighted average sales tax rate to the distribution channel 

markups to estimate overall markups for SPVU equipment. 

In this chapter, DOE first describes the market distribution channels and the methodology 

used to derive baseline and incremental markups. DOE then summarizes the results for (1) 

national markups estimation for each of the distribution channel segments and (2) regional 

markups estimation. DOE differentiated markups between national and regional estimations 

because costs contributing to markups differ among regions of the country. In all installations, 

sales tax is applied to the final customer cost. The development of the appropriate sales tax rate 

is described in section 6.10. 

6.2 DISTRIBUTION CHANNELS 

The appropriate markups for determining customer equipment prices depend on the types 

of distribution channels through which SPVU equipment moves from manufacturers to 

purchasers. At each point in the distribution channel, companies mark up the price of the 

equipment to cover their business costs and profit margin. 

6-1 
Based on a literature review and inquiries to the manufacturers, DOE believes that there 

are multiple distribution channels for new SPVU equipment and multiple distribution channels 

for replacement SPVU equipment that together describe how the equipment passes from the 

manufacturer to the final customer. These are shown in Figure 6.2.1. These market channels are 

partly based on interviews with the manufacturers, who provided information on the initial 

distribution of sales, the split among the final end users of the equipment, and the split between 

new and replacement units. 

New Construction, SPVU Equipment on Temporary Buildings

Replacement SPVU Equipment

Figure 6.2.1 Distribution Channels for SPVU Equipment

The new equipment distribution channel describes the sale and distribution of SPVU 

equipment that is attached to modular buildings, such as portable school classrooms; relocatable 

(“temporary”) offices at construction, mining, and other job sites; non-relocatable (“permanent”) 

office and retail buildings constructed from modular components; communications shelters and 

other remote facilities. In this distribution channel, the manufacturer of the SPVU equipment 

sells to a manufacturer of modular buildings, who then applies markup as part of its sales price 

for the building. Some of these sales are direct from a manufacturer of the SPVU equipment to a 

modular building manufacturer, but most appear to go through wholesale distributors of airconditioning equipment and involve a wholesaler or distributor markup. 

A fraction of all manufactured buildings is sold directly to the final customers via a 

general contractor. In this case, a general commercial contractor is assumed to purchase and 

install the modular or prefabricated building on behalf of the final customer, such as a school 

district or a telecommunications company. The contractor marks up the cost of the SPVU 

equipment imbedded in the cost of the building. 

SPVU 

Manufacturer

AC 

Distributor

Modular 

Building

Manufacturer

General 

Contractor

Customer

Modular 

Building

Distributor

SPVU 

Manufacturer

AC 

Distributor

Mechanical 

Contractor

Customer

Modular 

Building 

Distributor

6-2 
Another fraction of the modular buildings is sold to modular building distributors, who 

either re-sell the modular buildings at wholesale or lease the modular buildings. Lease 

arrangements for relocatable modular buildings are common in the construction industry and in 

other industries where the customer has a temporary need for office space at a job site. 

Distributors commonly lease a given relocatable building several times, and then sell the 

building in the used equipment market. Because modular building distributors must recover their 

operating costs whether they sell or lease modular buildings, DOE assumes for purposes of the 

notice of proposed rulemaking (NOPR) analysis that

1) a sale of a modular building would include a wholesale markup, and 

2) any lease contract between the modular building distributor and final customer would 

include a factor that reflects the depreciation cost of the modular building itself 

(including the SPVU equipment) as well as any additional distributor operating costs 

requiring a markup. 

The replacement equipment distribution channel describes sales of SPVU equipment used 

to replace failed or obsolete SPVU equipment. This distribution channel includes some direct 

sales to mechanical contractors, who mark up the replacement equipment to cover handling costs 

and also charge the final customer for installing it. Another fraction of the sales goes through a 

wholesale distributor of the AC equipment to the mechanical contractor who is replacing the 

equipment. Finally, some sales go through an AC equipment distributor to a modular building 

distributor who is engaged in leasing. It is likely that these modular building distributors have 

their own replacement crews or have mechanical contractors under service contracts to conduct 

replacement activities. Either way, the modular building distributor markup would cover the 

costs of replacement and would not be a separate charge. 

DOE believes that most SPVU units are used in modular buildings, specifically wood, 

metal and concrete prefabricated buildings. The distribution channels for wood and metal 

buildings were based on several annual reports from the Modular Building Institute1,2,3,4

. Most of 

the concrete prefab building manufacturers are not members of the Modula Building Institute, so 

a different set of information sources was used to characterize this SPVU distribution channel. 

According to interviews with SPVU manufacturers, about 35 percent of all SPVU 

equipment goes into telecommunications equipment shelters. Telecommunications shelters 

house electrical equipment for facilities such as radio towers, microwave relay towers, and 

cellular telephone towers. They often are manufactured out of concrete and steel for security 

reasons, although wood or steel telecommunications shelters are also common. 

Most of the manufacturers of concrete telecommunications shelters are not members of 

the Modular Building Institute and also produce modular buildings and structures other than 

telecommunications shelters. However, based on an extensive online search of for a variety of 

concrete modular buildings, it appears that concrete modular buildings that use SPVU equipment 

are almost exclusively telecommunications equipment shelters. DOE reconciled the market splits 

and distribution of the equipment reported in each of the available sources. 

6-3 
6.3 MARKUP CALCULATION METHODOLOGY

For the NOPR, DOE examined how markups change by efficiency level for each of the 

following segments in the distribution channel: 

1. AC equipment wholesalers and distributors 

2. Modular building manufacturers (wood, metal and concrete prefabricated 

buildings) 

3. Modular building wholesalers and distributors (wood, metal and concrete 

prefabricated buildings)

4. General contractors

5. Mechanical contractors

Wholesale distributors, modular building manufacturers and distributors, and contractors 

mark up the price of the SPVU equipment to cover their business costs and profit margins. In 

financial statements, gross margin is the difference between the company revenue and the 

company cost of sales or cost of goods sold. The gross margin includes the company expenses, 

such as overhead costs (sales, general, and administration), research and development and 

interest expenses, and depreciation and taxes, as well as company profits. For sales of a product 

to contribute positively to company cash flow, the product’s markup must cover the company’s 

gross margin. Equipment commands lower or higher markups depending on company expenses 

associated with the product and the degree of market competition. 

DOE determined that markups are neither fixed-dollar nor proportional to all direct 

costs, which means that the selling price of a product may not be strictly proportional to the 

purchase price of the equipment. The main reason that the selling price of a product may not be 

strictly proportional to the purchase price of the equipment is that businesses incur a wide variety 

of costs. When the purchase price of equipment and materials increases, only a fraction of the 

business expenses increases (variant cost), while the expenses for the remainder of the business 

stays relatively constant (invariant cost). For example, if the unit price of SPVU equipment 

increases by 30 percent, it is unlikely that the cost of administrative support also would increase 

by 30 percent. Certain business expenses are uncorrelated with the cost of equipment or cost of 

goods. 

Using the available data, DOE found measurable differences between incremental 

markups on direct equipment costs and the baseline markup on direct business costs for 

prefabricated building manufacturers and general contractors. Additionally, DOE discovered 

significant differences between baseline and incremental markups for mechanical contractors. 

Section 6.3.1 further discusses the differences between baseline and incremental markups. 

Sections 6.3.2 and 6.3.3 provide explanation how baseline and incremental markups are 

calculated, respectively. 

6.3.1 Assumptions 

DOE based the markups on industry-level financial data from the 2007 Economic Census 

and industry-reported data. DOE organized the financial data into representative income 

statements that break down cost components incurred by (1) firms that sell air-conditioning 

equipment at wholesale; (2) firms that manufacture and sell prefabricated/modular buildings; (3) 

6-4 
firms that lease and sell prefabricated/modular buildings; (4) general contractors that set up 

manufactured buildings on site; and (5) mechanical contracting firms that supply and install airconditioning equipment. The key assumptions used to estimate markups using these financial 

data are as follows.

1. The representative income statements faithfully represent the various average costs 

incurred by firms selling or installing SPVU equipment and modular buildings. 

2. These costs can be divided into two categories: (1) costs that vary in proportion to the 

MSP of SPVU equipment (“variant” costs); and (2) costs that do not vary with the 

MSP of SPVU equipment (“invariant” costs).

3. Overall, selling prices for SPVU equipment vary in proportion to business costs for 

SPVU equipment included in the income statements. 

In support of the first assumption, the income statements itemize firm costs into a number 

of expense categories, including direct costs to purchase or install the equipment, operating labor 

and occupancy costs, and other operating costs and profit. Although wholesalers, distributors, 

and mechanical contractors tend to handle multiple commodity lines, including room air 

conditioners, furnaces, central air conditioners, heat pumps, and boilers, the data provide the 

most accurate available indication of the expenses associated with SPVU equipment.

The second assumption is based on the information obtained from trade literature, 

selected manufacturers of SPVU equipment, and heating, ventilating, and air-conditioning 

(HVAC) contractors and consultants. This information indicates that contractor markups vary 

according to the quantity of labor and materials used to distribute and install appliances and 

equipment. In the following discussion, DOE assumes a division of costs between those that do 

not scale with the manufacturer price (labor and occupancy expenses) and those that do 

(operating expenses and profit). This division of costs into variant and invariant is used as a basis 

for separating baseline markups and incremental markups. 

In support of the third assumption, the SPVU supply chain is competitive, and customer 

demand for commercial heating and air conditioning is inelastic (i.e., the demand is not expected 

to decrease significantly with an increase in the price of equipment). The large number of HVAC 

and other relevant firms listed in the 2007 Economic Census indicates the competitive nature of 

the market. For example, there are 724 HVAC manufacturers,5 692 manufacturers of 

prefabricated wood buildings,6 723 manufacturers of prefabricated metal buildings,7 36,000 

commercial and institutional building contractors,8 and 91,000 HVAC contractors9 listed in the 

2007 Economic Census. Following standard economic theory, competitive firms facing inelastic 

demand either set prices in line with costs or quickly go out of business.10

6.3.2 Baseline Markups

As discussed in section 6.3.1, primary information sources used to obtain financial 

statements for this analysis provide data on the number of establishments, payroll for outside 

workers, and value of construction, cost of materials, cost of subcontracted work and other 

expenses. Based on this financial information, DOE calculated the baseline markup for each of 

the business types using the following equation: 

6-5 
Pay MatCost SubCost

V MU SALES

BASE + + =

Eq. 6.1 

Where:

MUBASE = baseline markup,

VSALES = value of sales, 

Pay = payroll for workers (direct cost), 

MatCost = cost of materials (including purchased fuels and electric power), and

SubCost = cost of subcontracted work. 

Value of sales in this analysis corresponds to the sum of two income statement items

shown in the detailed industry-level financial data: direct cost of goods sold and gross margin. 

The latter consists of labor expenses, occupancy expenses (rent, maintenance and utilities), and 

other operating expenses (depreciation, advertising and insurance), as well as operating profit. 

Payroll for workers appearing in the denominator is different from labor expenses included in 

gross margin as it represents direct labor costs and is therefore included in the direct costs of 

goods sold. Other two major cost categories in the direct cost of goods sold include cost of 

materials and cost of subcontracted work. 

6.3.3 Incremental Markups

2007 Economic Census breaks down firm costs into a number of detailed expense 

categories, including direct costs to purchase or install the equipment, operating labor expenses

and occupancy costs, as well as other operating costs and profit. Based on this breakdown, DOE 

assumes that direct labor expenses and occupancy expenses comprise the invariant cost, while 

other operating expenses and profit constitute the variant costs. 

DOE estimated the incremental markups by only marking up those costs that scale with a 

change in the SPVU manufacturer’s sales price (variant costs, VC) for higher energy efficiency 

products. DOE categorized the census cost data in each major cost category and estimated 

markups using the following equation: 

CGS

CGS VC MUINCR

+ =

Eq. 6.2 

Where:

MUINCR = incremental markup,

CGS = cost of goods sold, and 

VC = variant costs (other operating expenses and operating profit). 

6-6 
6.4 NATIONAL WHOLESALE DISTRIBUTOR MARKUPS 

This section describes the markups estimation for the agents in the SPVU market 

channels that primarily perform a function of wholesalers and distributors. This category of 

agents includes AC equipment wholesalers and distributors, as well as wholesalers and 

distributors of modular buildings, including wood, metal and concrete prefabricated buildings. 

6.4.1 Markups for Wholesale Distributors of AC Equipment 

Wholesale distributors of air-conditioning equipment reported data in a confidential 

survey that the Heating, Air-conditioning & Refrigeration Distributors International (HARDI) 

conducted of member firms.11 In the survey, HARDI itemized revenues and costs into cost 

categories, including direct equipment expenses (cost of goods sold), labor expenses, occupancy 

expenses, other operating expenses, and profit. DOE presents these data in full in appendix 6A. 

Table 6.4.1 summarizes the data as typical cost-per-dollar sales revenue in the first data column. 

Table 6.4.1 Expenses and Markups for Air-Conditioning Equipment Wholesale 

Distributors

Description

Per Dollar

Sales Revenue

$

Per Dollar 

Cost of Goods

$

Direct Cost of Equipment Sales: Cost of goods sold 0.739 1.000

Labor Expenses: Salaries and benefits 0.151 0.204

Occupancy Expense: Rent, maintenance, and utilities 0.035 0.047

Other Operating Expenses: Depreciation, advertising, and insurance 0.052 0.070

Operating Profit 0.023 0.031

Baseline Revenue: Baseline revenue earned per dollar cost of goods sold 1.353

Wholesaler Baseline Markup (MUAC WHOLE BASE) 1.353

Incremental Revenue: Increased revenue per dollar increase cost of goods sold 1.101

Incremental Markup (MUAC WHOLE INCR) 1.101

Source: Heating, Air-conditioning & Refrigeration Distributors International. 2013. 2013 Profit Report (2012 Data). Profit Planning Group, 

Boulder, Colorado. (Last accessed February 27, 2014.) <http://www.hardinet.org/Profit-Report >

In Table 6.4.1, direct equipment expenses (cost of goods sold) represent about $0.739 per 

dollar sales revenue, so for every $1.00 wholesalers take in as sales revenue, $0.739 is used to 

pay the direct equipment costs. Labor expenses represent $0.151 per dollar sales revenue, 

occupancy expenses represent $0.035, other operating expenses represent $0.052, and profit 

accounts for $0.023 per dollar sales revenue.

DOE converted the expenses per dollar sales into expenses per dollar cost of goods sold 

by dividing each figure in the first data column in Table 6.4.1 by $0.739 (i.e., cost of goods sold 

per dollar of sales revenue). The data in column two show that, for every $1.00 the wholesaler 

spends on equipment costs, the wholesaler spends $0.204 to cover labor costs, $0.047 to cover 

occupancy expenses, and $0.070 for other operating expenses, and realizes $0.031 in profits. 

This totals to $1.353 in sales revenue earned for every $1.00 spent on equipment costs. 

Therefore, the wholesaler baseline markup (MUAC WHOLE BASE) is 1.353 ($1.353 ÷ $1.00). 

Based on a survey of SPVU manufacturer websites, several use independent 

manufacturer’s representatives who substitute for an in-house sales force. These entities do not 

take delivery of equipment and do not maintain inventories, but they make sales calls, take 

6-7 
orders, and facilitate deliveries and perform sales related services.

12 Based on descriptions of 

manufacturer’s representatives found in the literature, these entities often charge their activities 

as part of the manufacturer’s delivered price but do not take a separate markup. For purposes of 

the NOPR, DOE assumes that manufacturer’s representatives’ sales comprise about half of the 

air-conditioning wholesale sales and are assumed to take no markup beyond the MSP (i.e., the 

cost of their services is included in the MSP). Thus, the weighted average baseline markup for 

air-conditioning equipment wholesaler is 1.177. 

DOE also used the data in column two of Table 6.4.1 to estimate the incremental 

markups. The incremental markup depends on which of the costs in Table 6.4.1 are variant and 

which are invariant with MSP. For example, for a $1.00 increase in the MSP, if all of the other 

costs scale with the MSP (i.e., all costs are variant), the increase in wholesale price will be 

$1.353, implying that the incremental markup is 1.353, or the same as the baseline markup. At 

the other extreme, if none of the other costs are variant, then a $1.00 increase in the MSP will 

lead to a $1.00 increase in the wholesale price, for an incremental markup of 1.0. 

As a reasonable representation of market behavior, DOE believes that the labor and 

occupancy costs will be invariant and that the other operating costs and profit will scale with the 

MSP (i.e., be variant). In this case, for a $1.00 increase in the MSP, the wholesale price will 

increase to match changes in “other” operating costs plus operating profit of $0.075, which when 

divided by $0.739 in cost of goods sold yields an increase of $0.101, giving a wholesaler 

incremental markup (MUAC WHOLE INCR) of 1.101. See appendix 6A for cost details. Similar to the 

baseline markup, DOE assumes that manufacturer’s representatives take no incremental markup, 

resulting in a weighted average incremental markup of 1.051. 

6.4.2 Markups for Wholesale Distributors of Prefabricated Wood and Metal 

Buildings 

Wholesale markups for distributors of prefabricated modular buildings are derived from 

costs experienced by merchant wholesalers for both prefabricated wood buildings (North 

American Industry Classification System (NAICS) 423310) 13 and prefabricated metal buildings 

(NAICS 423390),14 published in the 2007 Economic Census. Table 6.4.2 and Table 6.4.3

summarize the gross margin (costs other than direct costs of goods sold, plus operating profit) 

per dollar of sales revenue in the first data column, and as a margin over direct costs of goods 

sold in the second column. For wood building distributors, direct equipment expenses (cost of 

goods sold) represent about $0.802 per dollar sales revenue, so for every $1.00 wholesalers take 

in as sales revenue, $0.802 is used to pay the direct equipment costs. Gross margin (which 

includes all other costs and profit) represents $0.198 per dollar sales revenue. 

DOE converted the expenses per dollar sales into expenses per dollar cost of goods sold 

by dividing each figure in the first data column of Table 6.4.2 by $0.802 (i.e., cost of goods sold 

per dollar of sales revenue). The data in column two show that, for every $1.00 the wholesaler 

spends on equipment costs, $0.247 are spent to cover other costs and profits. This totals to 

$1.247 in sales revenue earned for every $1.00 spent on equipment costs. Therefore, the 

wholesaler baseline markup (MUWOOD_ BLDG_ WHOLE_ BASE) is 1.247 ($1.247 ÷ $1.00). For metal

building distributors, calculated in the same way, the wholesaler baseline markup is 1.456. 

6-8 
Table 6.4.2 Expenses and Markups for Prefabricated Wood Building Wholesale

Distributors 

Description

Per Dollar

Sales Revenue

$

Per Dollar Cost 

of Goods

$

Direct Cost of Equipment Sales: Cost of goods sold 0.802 1.000

Gross Margin: Other costs and operating profit 0.198 0.247

Baseline Revenue: Baseline revenue earned per dollar cost of goods sold 1.247

Wholesaler Baseline Markup (MUWOOD BLDG WHOLE BASE) 1.247

Source: U.S. Census Bureau. 2007. 423310 Lumber, plywood, millwork, and wood panel merchant wholesalers. EC0742SXSB06. Wholesale 

Trade: Subject Series - Misc Subjects: Gross Margin and its Components for Merchant Wholesalers for the United States: 2007. (Last accessed 

October 29, 2013.) 

<http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_42SXSB06&prodType=table >

Table 6.4.3 Expenses and Markups for Prefabricated Metal Building Wholesale 

Distributors 

Description

Per Dollar

Sales Revenue

$

Per Dollar Cost 

of Goods

$

Direct Cost of Equipment Sales: Cost of goods sold 0.687 1.000

Gross Margin: Other costs and operating profit 0.313 0.456

Baseline Revenue: Baseline revenue earned per dollar cost of goods sold 1.456

Wholesaler Baseline Markup (MUMETAL BLDG WHOLE BASE) 1.456

Source: U.S. Census Bureau. 2007. 423390. Other construction material merchant wholesalers. EC0742SXSB06. Wholesale Trade: Subject 

Series - Misc Subjects: Gross Margin and its Components for Merchant Wholesalers for the United States: 2007. (Last accessed October 29, 

2013.) <http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_42SXSB06&prodType=table>

 The sales weighted average of the two building distributor markup factors is 82.7% × 

1.247 + 17.3% × 1.456 = 1.283. The market percentages for the split between wood and metal 

modular buildings (82.7% and 17.3%, respectively) are based on data for the period 2005 

through 2010 from the Modular Building Institute cited in section 6.2. 

Published census cost data for this particular segment are not detailed enough to allow 

calculation of incremental markups or regional markups for wood and metal modular building 

distributors. Therefore incremental markup for these agents in the SPVU market channels is 

assumed to be the same as the baseline markup.

6.4.3 Markups for Wholesale Distributors of Prefabricated Concrete Buildings 

 For the purposes of this analysis, primary designation of the concrete buildings with 

SPVU equipment is telecommunications and electronics shelters. The 2007 Census Bureau data 

on brick, stone and related construction material merchant wholesalers was used to derive the 

markups for concrete building wholesalers and telecommunications and electronics enclosures 

distributors. Table 6.4.3 summarize the gross margin (costs other than costs of goods sold, plus 

profit) per dollar of sales revenue in the first data column, and as a margin over costs of goods 

sold in the second column. 

6-9 
Table 6.4.4 Expenses and Markups for Prefabricated Concrete Building Wholesale 

Distributors 

Description

Per Dollar

Sales Revenue

$

Per Dollar Cost 

of Goods

$

Direct Cost of Equipment Sales: Cost of goods sold 0.649 1.000

Gross Margin: Other (non-labor, non-occupancy) expenses and 

operating profit

0.350 0.539

Baseline Revenue: Baseline revenue earned per dollar cost of goods sold 1.539

Wholesaler Baseline Markup 1.539

*Detail may not add to total due to rounding.

Source: U.S. Census Bureau. 2007. Brick, stone, and related construction material merchant wholesalers. Sector 42: . 423320 Other 

Construction Material Merchant Wholesalers. Brick, stone, and related construction material merchant wholesalers: Merchant wholesalers, 

except manufacturers' sales branches and offices. Detailed Statistics by Industry for the United States: 2007 .(Last accessed October 29, 2013.) <

http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_42SXSB06&prodType=table >

As shown in the first column, the direct cost of sales (payroll and materials, including 

energy and subcontracted work) represents about $0.649 per dollar sales revenue to the concrete 

building wholesalers and distributors. Other (non-labor, non-occupancy) expenses and operating 

profit represents $0.350 per dollar of sales revenue. 

DOE converted these expenses per dollar sales into revenue per dollar cost of goods sold 

by dividing each figure in the first data column by $0.649. The data in column two of Table 6.4.4

show that, for every $1.00 the concrete building distributor spends on equipment costs, the 

concrete building distributor earns $1.00 in sales revenue to cover the equipment cost, $0.539 to 

cover other (non-labor, non-occupancy) expenses and operating profit. This totals to $1.539 in 

sales revenue earned for every $1.00 spent on equipment costs. Thus, the concrete building 

distributor baseline markup is 1.539. Incremental markup for prefabricated concrete building 

wholesale distributors is assumed to be the same as the baseline markup. 

6.5 PREFABRICATED BUILDING MANUFACTURER MARKUPS 

To estimate manufacturer markups for modular buildings, DOE collected financial data 

from U.S. Census Bureau on the prefabricated wood buildings sector (NAICS 321992) and the 

prefabricated metal buildings sector (NAICS 321311) in 2007 Economic Census. These sectors 

include establishments primarily engaged in factory-based assembly of prefabricated buildings 

such as portable classrooms and offices. For concrete shelter manufacturers, DOE used financial 

data on the Other Concrete Product Manufacturing (NAICS 327390).

6.5.1 Prefabricated Wood Building Manufacturer Markups

The U.S. Census Bureau data for the prefabricated wood buildings, prefabricated metal 

buildings and prefabricated concrete buildings provide detailed statistics for the industry as a 

whole in total dollars. Consistent with the assumptions stated in section 6.3.1, DOE assumed 

that the total dollar values that the U.S. Census Bureau reported, once converted to a percentage 

basis, represented revenues and expenses for an average or typical prefabricated building 

manufacturing business in the corresponding market segment. Table 6.5.1 summarizes the 

expenses for prefabricated wood building manufacturers per dollar sales revenue in the first data 

column (appendix 6A contains the full set of data). 

6-10
Table 6.5.1 Expenses and Markups for Prefabricated Wood Building Manufacturers 

Description

Prefabricated Building Firm 

Expenses or Revenue*

Per Dollar

Sales Revenue

$

Per Dollar 

Cost of Goods

$

Direct Cost of Equipment Sales: Cost of goods sold 0.671 1.000

Labor Expenses: Fringe benefits 0.056 0.083

Occupancy Expense: Rent, maintenance, and non-energy utilities 0.019 0.028

Other Operating Expenses: Depreciation, advertising, and insurance 0.073 0.109

Net Profit Before Taxes 0.181 0.270

Baseline Markup (MU WOOD BLDG MFG BASE): Revenue per dollar cost of goods 1.490

Incremental Markup (MUWOOD BLDG MFG INCR): Increased revenue per dollar 

increase cost of goods sold 1.379

*Detail may not add to total due to rounding.

Source: U.S. Census Bureau. 2007. Prefabricated Wood Building Manufacturing. Sector 32: 321992. EC0731I1 Manufacturing: Industry Series: 

Detailed Statistics by Industry for the United States: 2007. (Last accessed October 29, 2013.) <

http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_31I1&prodType=table> 

As shown in the first column, the direct cost of sales (payroll and materials, including 

energy and subcontracted work) represents about $0.671 per dollar sales revenue to the wood 

building manufacturer. Labor fringe benefit expenses (employer’s cost for health insurance, 

pension plans, etc.) represent $0.056 per dollar sales revenue, occupancy expenses represent 

$0.019 per dollar sales revenue, other operating expenses represent $0.073, and operating profit 

makes up $0.181 per dollar sales revenue.

DOE converted these expenses per dollar sales into revenue per dollar cost of goods sold 

by dividing each figure in the first data column by $0.671. The data in column two of Table 6.5.1

show that, for every $1.00 the wood building manufacturer spends on equipment costs, the wood 

building manufacturer earns $1.00 in sales revenue to cover the equipment cost, $0.083 to cover 

labor costs, $0.028 to cover occupancy expenses, $0.109 for other operating expenses, and $0.27 

in profits. This totals to $1.49 in sales revenue earned for every $1.00 spent on equipment costs. 

Thus, the general contractor baseline markup (MU WOOD_ BLD_ MFG_ BASE) is 1.49. 

DOE was also able to use the data in column two of Table 6.5.1 to estimate the 

incremental markups, after classifying the costs as either invariant or variant. At one extreme, if 

all of the other costs scale with the equipment price (i.e., all costs are variant), the increase in 

building manufacturer price will be $1.49, implying that the incremental markup is 1.49, or the 

same as the baseline markup. At the other extreme, if none of the other costs are variant, then a 

$1.00 increase in the equipment price will lead to a $1.00 increase in the building manufacturer 

price, for an incremental markup of 1.0. DOE believes the labor and occupancy costs to be 

invariant and the other operating costs and profit to scale with the equipment price (i.e., be 

variant). In this case, for a $1.00 increase in the equipment price, the building manufacturer price 

will increase by $1.379, giving a wood building manufacturer incremental markup (MU WOOD_BLD_ 

MFG_ INCR) of 1.379. Although there likely is some regional variation in the prefabricated wood 

building markets, DOE has no data on the pattern of regional shipments, so DOE assumed that 

the base and incremental markups were the same in all parts of the country for this industry. 

6-11
6.5.2 Prefabricated Metal Building Manufacturer Markups

Similar calculations were done for metal building manufacturers, as shown in Table 

6.5.2. Baseline markup for metal building manufacturers is 1.454, while the incremental markup 

equals 1.364. 

Table 6.5.2 Expenses and Markups for Prefabricated Metal Building Manufacturers

Description

Prefabricated Building Firm 

Expenses or Revenue*

Per Dollar

Sales Revenue

$

Per Dollar 

Cost of Goods

$

Direct Cost of Equipment Sales: Cost of goods sold 0.688 1.000

Labor Expenses: Fringe benefits 0.044 0.064

Occupancy Expense: Rent, maintenance, and non-energy utilities 0.018 0.026

Other Operating Expenses: Depreciation, advertising, and insurance 0.093 0.136

Net Profit Before Taxes 0.157 0.229

Baseline Markup (MU METALBLDG MFG BASE): Revenue per dollar cost of goods 1.454

Incremental Markup (MUMETALBLDG MFG INCR): Increased revenue per dollar 

increase cost of goods sold 1.364

*Detail may not add to total due to rounding.

Source: U.S. Census Bureau. 2007. Prefabricated Metal Building and Component Manufacturing. Sector 33: 332311. EC0731I1 Manufacturing: 

Industry Series: Detailed Statistics by Industry for the United States: 2007. (Last accessed October 29, 2013.) <

http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_31I1&prodType=table>

The value of primary products shipped by the two industries in 2007 was $3.76 billion for 

wood buildings and $6.68 billion for metal buildings, and their respective shares of the market 

were 36.0 percent and 64.0 percent. 

The sales-weighted average baseline markup for prefabricated wood and metal building 

manufacturers was 

(0.36 × 1.489 + 0.64 × 1.454) = 1.467. 

Similarly, the sales-weighted average for the incremental markup was 

 (0.36 × 1.379 + 0.64 × 1.364) = 1.369. 

Weighted average values were used in the markup analysis.

6.5.3 Prefabricated Concrete Building Manufacturer Markups

 The U.S. Census Bureau data for Other Concrete Manufacturing (NAICS 327390) 

provide detailed statistics for the industry as a whole in total dollars. Table 6.5.13 summarizes 

the expenses for prefabricated concrete building manufacturers as expenses per dollar sales 

revenue in the first data column and per dollar cost of goods sold in the second data column. 

As shown in the first column, the direct cost of sales represents about $0.570 per dollar 

sales revenue to the concrete building manufacturer. Labor expenses represent $0.061 per dollar 

6-12
sales revenue, occupancy expenses represent $0.032 per dollar sales revenue, other operating 

expenses represent $0.164, and profit makes up $0.173 per dollar sales revenue. 

Table 6.5.3 Expenses and Markups for Prefabricated Concrete Building Manufacturers

Description

Prefabricated Building Firm 

Expenses or Revenue*

Per Dollar

Sales Revenue

$

Per Dollar 

Cost of Goods

$

Direct Cost of Equipment Sales: Cost of goods sold 0.570 1.000

Labor Expenses: Salaries (indirect) and benefits 0.061 0.108

Occupancy Expense: Rent, maintenance, and non-energy utilities 0.032 0.057

Other Operating Expenses: Depreciation, Acctg, Advertising, Insurance, other 0.164 0.288

Net Profit Before Taxes 0.173 0.304

Baseline Markup : Revenue per dollar cost of goods 1.756

Incremental Markup: Increased revenue per dollar increase cost of goods sold 1.591 *Detail may not add to total due to rounding.

Source: U.S. Census Bureau. 2007. Other Concrete Product Manufacturing: 2007. Sector 32: 327390. Manufacturing: Industry Series: Detailed 

Statistics by Industry for the United States: 2007. (Last accessed October 29, 2013.) 

<http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_31I1&prodType=table>

DOE converted expenses per dollar sales into revenue per dollar cost of goods sold by 

dividing each figure in the first data column by $0.570. For every $1.00 the concrete building 

manufacturer spends on equipment costs, the concrete building manufacturer earns $1.00 in sales 

revenue to cover the equipment cost, $0.108 to cover indirect salaries and benefits, $0.057 for 

occupancy expenses, $0.288 for other operating expenses and $0.304 in net operating profit. This 

totals to $1.756 of revenue for every dollar in cost of goods sold, for a baseline markup of 1.756. 

Calculation of the incremental markups requires separation of the invariant and variant 

costs. DOE believes the labor and occupancy costs to be invariant and the other operating costs 

and profit to scale with the equipment price (i.e., be variant). For every dollar in cost of goods 

sold, the concrete manufacturer earns $0.288 to cover the other operating expenses and $0.304 in 

profit. Therefore the variant costs that scale up incrementally equal $0.591. Therefore, for a 

$1.00 increase in the cost of goods sold, the concrete building manufacturer price will increase 

by $1.591, resulting in the incremental markup of 1.591. 

6.6 NATIONAL MECHANICAL CONTRACTOR MARKUPS

To estimate mechanical contractor markups for SPVU equipment, DOE used detailed 

2007 Economic Census data for Plumbing, Heating, and Air-Conditioning Contractors (NAICS 

238220), defined as mechanical contractors for the purposes of this analysis. Baseline and 

incremental markups for mechanical contractors are shown in Table 6.6.1. (Appendix 6A 

contains the full set of data used to calculate the incremental markup.) 

DOE converted expenses per dollar sales into revenue per dollar cost of goods sold by 

dividing each figure in the first data column by $0.678. For every $1.00 the mechanical 

contractor spends on equipment costs, the mechanical contractor earns $1.00 in sales revenue to 

cover the equipment cost, and $0.474 to cover the other costs (labor, occupancy and other 

6-13
operating expenses). This totals $1.474 in sales revenue earned for every $1.00 spent on 

equipment costs, for a baseline markup (MUMECH CONT BASE) of 1.474. 

Calculation of the incremental markups requires separation of the invariant and variant

costs. DOE believes the labor and occupancy costs to be invariant and the other operating costs 

and profit to scale with the equipment price (i.e., be variant). Therefore, for a $1.00 increase in 

the equipment price, the mechanical contractor price will increase by $1.184, resulting in the 

incremental markup (MUMECH CONT INCR) of 1.184. 

Table 6.6.1 Expenses and Markups for Mechanical Contractors 

Description

Contractor Expenses or Revenue*

Per Dollar

Sales Revenue

$

Per Dollar 

Cost of Goods

$

Direct Cost of Equipment Sales: Cost of goods sold 0.678 1.000

Labor Expenses: Fringe benefits 0.175 0.258

Occupancy Expense: Rent, maintenance, and utilities 0.022 0.032

Other Operating Expenses: Depreciation, advertising, and insurance 0.039 0.058

Net Profit Before Taxes 0.086 0.127

Baseline Markup (MU MECH CONT BASE): Revenue per dollar cost of 

goods 1.474

Incremental Markup (MU MECH CONT INCR): Increased revenue per dollar 

increase cost of goods sold 1.184

*Detail may not to total due to rounding.

Source: U.S. Census Bureau. 2007. Plumbing, Heating, and Air-Conditioning Contractors. Sector 23: 238220. EC0723I1: Construction: Industry 

Series: Preliminary Detailed Statistics for Establishments: 2007. (Last accessed October 29, 2013.) 

<http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_23I1&prodType=table>

6.7 NATIONAL GENERAL CONTRACTOR MARKUPS

To estimate general contractor markups for SPVU equipment, DOE collected financial 

data from the Commercial and Institutional Building Construction (NAICS 236220) series, from 

the 2007 Economic Census. 

DOE derived markups for general contractors from 2007 Economic Census data for the 

commercial and institutional building construction sector. The commercial and institutional 

construction sector includes establishments primarily engaged in construction work, including 

new construction work, additions, alterations, and repairs. The U.S. Census Bureau data for the 

construction sector include detailed statistics for establishments with payrolls, but the U.S. 

Census Bureau reports itemized revenues and expenses for the construction industry as a whole 

in total dollars rather than in typical values for an average or representative business. Because of 

this, DOE assumed that the total dollar values that the U.S. Census Bureau reported, once 

converted to a percentage basis, represented revenues and expenses for an average or typical 

contracting business. Table 6.7.1 summarizes the expenses for general contractors as expenses 

per dollar sales revenue in the first data column (appendix 6A contains the full set of data). 

6-14
Table 6.7.1 Expenses and Markups for General Contractors 

Description

General Contractor Firm Expenses 

or Revenue*

Per Dollar

Sales Revenue

$

Per Dollar 

Cost of Goods

$

Direct Cost of Equipment Sales: Cost of goods sold 0.762 1.000

Labor Expenses: Salaries (indirect) and benefits 0.077 0.101

Occupancy Expense: Rent, maintenance, and utilities 0.010 0.013

Other Operating Expenses: Depreciation, advertising, and insurance 0.015 0.020

Net Profit Before Taxes 0.135 0.177

Baseline Markup (MUGEN CONT BASE): Revenue per dollar cost of goods 1.311

Incremental Markup (MUGEN CONT INCR): Increased revenue per dollar 

increase cost of goods sold 1.197

*Detail may not to total due to rounding

Source: U.S. Census Bureau. 2007. Commercial and Institutional Building Construction. Sector 23: 236220. EC0723I1: Construction: Industry 

Series: Preliminary Detailed Statistics for Establishments: 2007. (Last accessed October 29, 2013.) 

<http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_23I1&prodType=table>

As shown in the first column, the direct cost of sales represents about $0.762 per dollar 

sales revenue to the general contractor. Labor expenses represent $0.077 per dollar sales revenue, 

occupancy expenses represent $0.01 per dollar sales revenue, other operating expenses represent 

$0.015, and profit makes up $0.135 per dollar sales revenue.

DOE converted these expenses per dollar sales into revenue per dollar cost of goods sold 

by dividing each figure in the first data column by $0.762. The data in column two show that, for 

every $1.00 the general contractor spends on equipment costs, the general contractor earns $1.00 

in sales revenue to cover the equipment cost, $0.101 to cover labor costs, $0.013 to cover 

occupancy expenses, $0.02 for other operating expenses, and $0.177 in profits. This totals to 

$1.311 in sales revenue earned for every $1.00 spent on equipment costs. Thus, the general 

contractor baseline markup (MUGEN CONT BASE) is 1.311. 

DOE was also able to use the data in column two in Table 6.7.1 to estimate the 

incremental markups, after classifying the costs as either invariant or variant. At one extreme, if 

all of the other costs scale with the equipment price (i.e., all costs are variant), the increase in 

general contractor price will be $1.311, implying that the incremental markup is 1.311, or the 

same as the baseline markup. At the other extreme, if none of the other costs are variant, then a 

$1.00 increase in the equipment price will lead to a $1.00 increase in the general contractor price, 

for an incremental markup of 1.0. DOE believes the labor and occupancy costs to be invariant 

and the other operating costs and profit to scale with the equipment price (i.e., be variant). In this 

case, for a $1.00 increase in the equipment price, the general contractor price will increase by 

$1.197, giving a general contractor incremental markup (MUGEN CONT INCR) of 1.197. 

6.8 REGIONAL EQUIPMENT WHOLESALER MARKUPS

Besides median national data, the survey of HARDI member firms discussed in section 

6.4 provided itemized revenue and cost data for typical firms in seven regions of the country 

(Table 6A.5.1, Appendix 6A). This allowed DOE to calculate regional baseline and incremental 

markups in each region in the same way as reported in section 6.4. 

6-15
Each state in a given region could have been assigned the directly calculated regional 

markups. Instead of using this simplified approach DOE attempted to capture regional variability 

in markups. DOE calculated the ratio of the baseline markup and incremental markup in each 

region to the national average value calculated for all of the regions to derive relative markup 

values for each region, which were then assigned to each state. The equipment costs are 

multiplied by the national values for both baseline and incremental markups, and then multiplied 

by the relative state ratios for baseline and incremental markup. 

For example, as shown in appendix 6A (Table 6A.5.2), the baseline and incremental 

markups for California (West region) are 1.404 and 1.110 respectively, which translates to state

relative markup values of 1.038 and 1.007. The relative baseline equipment distributor markup 

for California (1.038) would be multiplied by the national markup factor of 1.353 from Table 

6.3.1, yielding a baseline markup of 1.404. If instead the incremental markup was needed, the 

1.007 incremental relative markup would be multiplied by the national incremental markup 

factor of 1.101, yielding an incremental equipment distributor markup value of 1.109. 

6.9 REGIONAL CONTRACTOR MARKUPS

The 2007 Economic Census provides Geographic Area Series for both the Plumbing and 

HVAC Contractors (NAICS 23822) sector and for the Commercial and Institutional Building 

Contractors (NAICS 236220) sector. The geographic data series contain state-level sales and 

cost data, including value of construction, cost of subcontract work, cost of materials, and payroll 

for construction workers (Appendix 6A, Tables 6A.5.3 and 6A.5.4). Using this regional cost 

detail, DOE was able to estimate baseline markups for each state for both sectors. Because the 

census does not provide more disaggregated cost data at the state level, DOE was unable to 

differentiate between invariant and variant cost. 

DOE also calculated a state-level relative baseline markup (Appendix 6A, last column in 

Tables 6A.5.3 and 6A.5.4), which equals to the ratio of each state’s baseline markup and the 

national average markup (Appendix 6A, Table 6A.5.3 and 6A.5.4, next to last column). The 

relative state values were then multiplied by the national values for both baseline and 

incremental markups (Tables 6.5.1 and 6.5.2). The advantage of this approach is that DOE is 

able to estimate regional markups based on the U.S. census data. 

For example, as shown in appendix 6A, the mechanical contractor baseline markup for 

California is 1.539, while the national average is 1.477. Dividing the California value by the 

national average results in the relative mechanical contractor markup of 1.043 for California. 

This relative markup of 1.043 is then multiplied by the national mechanical markup factor of 

1.474 (Table 6.5.4), yielding a mechanical contractor baseline markup of 1.537. 

If instead the incremental markup was needed, the 1.043 relative markup value would be 

multiplied by the mean incremental markup factor of 1.184 (Table 6.5.4), yielding a mechanical 

contractor markup value of 1.235. 

Similarly, for general contractors, the baseline California markup was 1.348. The relative 

California ratio was 1.026 (Appendix A, Table 6A.5.4), and the California baseline and 

6-16
incremental markup values were derived from their national values of 1.311 and 1.197 (Table 

6.6.1) as 1.345 and 1.228, respectively. 

6.10 SALES TAX 

The sales tax represents state and local sales taxes that are applied to the customer price 

of the equipment. The sales tax is a multiplicative factor that increases the customer equipment 

price.

DOE derived state and local taxes from data provided by the Sales Tax Clearing House.15

These data represent weighted averages that include county and city rates. Detailed sales tax data 

by each state can be found in appendix 6A. 

6.11 OVERALL MARKUPS 

The overall markup for each distribution channel is the product of the appropriate 

markups, as well as sales tax (Table 6.11.1).

DOE used the overall baseline markup to estimate the customer product price of baseline 

models, given the manufacturer cost of the baseline models. As previously stated, DOE considers 

baseline models to be products sold under existing market conditions (i.e., without new energy 

conservation standards). The following equation shows how DOE used the overall baseline 

markup to determine the product price for new baseline models.

( )

MSP OVERALL BASE

MFG BASE DISTRIB DIST BLDG BASE GEN GEN BASE SALES

BASE MSP AC DIRECT MFG AC WHOLE AC WHOLE BASE

PRICE MU

MU PCT MU PCT MU GENINDEX Tax

CPP PRICE PCT PCT MU

_

_ __ _

__ _ __

( )

( )

= ×

× × ×+ × ×

= × + × ×

Eq. 6.3 

Where:

CPPBASE = customer product price for baseline models,

PRICEMSP = manufacturer sales price for baseline models,

PCTAC_DIRECT_MFG = percentage of sales directly to building manufacturers, 

PCTAC_WHOLE = percentage of sales to air-conditioning equipment wholesalers and distributors, 

MUAC_WHOLE_ BASE = average baseline markup for air-conditioning equipment wholesalers and 

distributors, 

MUMFG_BASE = weighted average baseline building manufacturer markup, 

PCTDISTRIB = percentage of buildings sold to wholesale distributors, 

MUDIST_BLDG_BASE = weighted average baseline building distributor markup, 

PCTGEN = percentage of buildings sold directly to contractors, 

MUGEN_BASE = baseline general contractor markup, 

GENINDEX = general contractor regional cost index, 

TaxSALES = sales tax (replacement applications only), and

MUOVERALL_BASE = baseline overall markup.

6-17
Similarly, DOE used the overall incremental markup to estimate changes in the customer

product price for new energy-efficient equipment, given changes in the manufacturer cost from 

the baseline model cost resulting from an energy conservation standard to raise product energy 

efficiency. The total customer product price for more energy efficient models is composed of 

two components: (1) the customer product price of the baseline model and (2) the change in 

customer product price associated with the increase in manufacturer cost to meet the new energy 

conservation standard. The following equation shows how DOE used the overall incremental 

markup to determine the customer product price for more energy efficient models (i.e., models 

meeting new energy conservation standards). 

( )

BASE MSP OVERALL INCR

MFG INCR DISTRIB DIST BLDG INCR GEN GEN INCR SALES

MSP AC DIRECT MFG AC WHOLE AC WHOLE INCR

STD MSP OVERALL BASE

CPP PRICE MU

MU PCT MU PCT MU GENINDEX Tax

PRICE PCT PCT MU

CPP PRICE MU

_

_ __ _

__ _ __

_

( )

( )

D+= ×

× × ×+ × ×

D × + × ×

= × +

Eq. 6.4 

Where:

CPPSTD = customer product price for models meeting new energy conservation standards, 

PRICEMSP = manufacturer sales price for baseline models,

MUOVERALL_BASE = baseline overall markup (product of manufacturer and general contractor 

markup and sales tax), and

ΔPRICEMSP = change in manufacturer sales price for higher energy efficient models,

PCTAC_DIRECT_MFG = percentage of sales directly to building manufacturers, 

PCTAC_WHOLE = percentage of sales to air-conditioning equipment wholesalers and distributors, 

MUAC_WHOLE_INCR = average incremental markup for air-conditioner wholesalers and distributors, 

MUMFG_INCR = weighted average incremental markup for manufacturers of portable buildings for 

higher energy efficient models,

PCTDISTRIB = percentage of buildings sold to wholesale distributors, 

MUDIST_BLDG_INCR = weighted average incremental building distributor markup, 

PCTGEN = percentage of buildings sold directly to contractors,

MUGEN_INCR = incremental general contractor markup, 

GENINDEX = general contractor regional cost index,

TaxSALES = sales tax,

CPPBASE = customer product price for baseline models, 

MUOVERALL_INCR = incremental overall markup.

DOE also calculated the overall baseline markup for replacement models. The following 

equation shows how DOE used the overall baseline markup to determine the baseline product 

price for replacement models.

6-18
MSP OVERALL BASE

AC WHOLESALE BASE DISTRIB DIST BLD BASE SALES

MECH BASE

MECH AC WHOLESALE BASE AC MECH

BASE MSP

PRICE MU

MU PCT MU Tax

MU MECHINDEX

PCT MU PCT WHSLBASEINDEX

CPP PRICE

_

_ _ __

_

_ _ _

)

(( )

= ×

























× × ×

× +

+ × × ×

= ×

Eq. 6.5 

Where:

CPPBASE = customer product price for baseline models, 

PRICEMSP = manufacturer sales price for baseline models,

PCTMECH = percentage sold by air-conditioning manufacturers to direct to mechanical 

contractors, 

MUAC_WHOLESALE_BASE = baseline air-conditioning equipment wholesale distributor markup,

PCTAC_MECH = percentage of sales from air-conditioning equipment wholesalers to mechanical 

contractors,

WHSLBASEINDEX = equipment wholesaler base regional cost index,

MUMECH_BASE = baseline mechanical contractor markup,

MECHINDEX = mechanical contractor regional cost index,

PCTDISTRIB = percentage of air-conditioning equipment sold by air-conditioning wholesalers to 

buildings wholesale distributors, 

MUDIST_BLDG_BASE = baseline building distributor markup,

TaxSALES = sales tax (replacement applications only), and

MUOVERALL_BASE = baseline overall markup.

Similarly, DOE used the overall incremental markup to estimate changes in the customer

product price for replacement equipment. The following equation shows how DOE used the 

overall incremental markup to determine the customer product price for more energy efficient 

models (i.e., models meeting new energy conservation standards). 

BASE MSP OVERALL INCR

DISTRIB DISTRIB INCR SALES

AC WHOLESALE INCR DISTRIB DIST BLD INCR

MECH INCR

MECH AC WHOLESALE INCR AC MECH

STD MSP OVERALL BASE MSP

CPP PRICE MU

PCT MU Tax

MU PCT MU

MU MECHINDEX

PCT MU PCT WHSLINCRINDEX

CPP PRICE MU PRICE

_

_

_ _ __

_

_ _ _

_

)

(( )

D+= ×





























× ×

× × +

× +

+ × × ×

= × D+ ×

Eq. 6.6 

Where:

CPPSTD = customer product price for models meeting new energy conservation standards, 

PRICEMSP = manufacturer sales price for baseline models,

MUOVERALL_BASE = baseline overall markup (product of manufacturer and general contractor 

markup and sales tax), and

6-19
ΔPRICEMSP = change in manufacturer sales price for higher energy efficient models,

PCTMECH = percentage sold by air-conditioning manufacturers direct to mechanical contractors, 

MUAC_WHOLESALE_INCR = incremental air-conditioning wholesale distributor markup, 

PCTAC_MECH = percentage of sales from air-conditioning equipment wholesalers to mechanical 

contractors, 

WHSLINCRINDEX = equipment wholesaler incremental regional cost index,

MUMECH_INCR = incremental mechanical contractor markup,

MECHINDEX = mechanical contractor regional cost index,

PCTDISTRIB = percentage of air-conditioning equipment sold by air-conditioning wholesalers to 

buildings wholesale distributors, 

MUDIST_BLDG_INCR = incremental building distributor markup,

TaxSALES = sales tax,

CPPBASE = customer product price for baseline models, 

MUOVERALL_INCR = incremental overall markup.

National average baseline and incremental markups for each market participant are 

summarized in Table 6.11.1. 

Table 6.11.1 Summary of National Average Overall Markups on SPVU Equipment 

Baseline Markup Incremental Markup

New Construction

Weighted Average Air-Conditioning Equipment 

Wholesale Distributor Markup 1.177 1.051

Building Manufacturer Markup, Weighted Average 

for Wood and Metal Prefabricated Buildings 1.467 1.369

Building Manufacturer Markup for Concrete 

Prefabricated Buildings 1.756 1.591

Building Wholesale Distributor Markup, Weighted 

Average for Wood and Metal Buildings 1.283* 1.283*

Building Wholesale Distributor Markup, Concrete 

Buildings 1.539* 1.539* 

General Contractor Markup 1.311 1.197

Sales Tax (National Population-Weighted Average) 1.072 1.072

Overall Markup (Weighted U.S. Average) 2.308** 1.941**

Replacement

Weighted Average Air-Conditioning Equipment 

Wholesale Distributor Markup 1.177 1.051 

Mechanical Contractor Markup 1.474 1.184

Building Wholesale Distributor Markup, Weighted 

Average for Wood and Metal Buildings 1.283* 1.283* 

Building Wholesale Distributor Markup, Concrete 

Buildings 1.539* 1.539*

Sales Tax (National Population-Weighted Average) 1.072 1.072

Overall Markup (Weighted U.S. Average) 1.609** 1.337**

* The baseline markup is also being used as the incremental markup. Data available from the 2007 Economic Census did not allow an 

incremental markup to be calculated.

** The actual distribution channels are complex. For example, air-conditioning distributors are assumed to be a combination of 

manufacturer’s representatives and full-service wholesalers who sell to building manufacturers. Manufacturing wholesalers sell to both 

contractors and to distributors. Consequently, the overall markup cannot be derived directly from the component average markups. 

6-20
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