6-i

CHAPTER 6. MARKUPS ANALYSIS

TABLE OF CONTENTS

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

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

6.3 APPROACH FOR MANUFACTURER MARKUP ....................................................... 6-3

6.4 APPROACH FOR WHOLESALER AND CONTRACTOR MARKUPS ..................... 6-3

6.4.1 Wholesaler Markup.......................................................................................................... 6-5

6.4.2 Mechanical and General Contractor Markups................................................................. 6-6

6.5 DERIVATION OF MARKUPS ...................................................................................... 6-7

6.5.1 Manufacturer Markup ...................................................................................................... 6-7

6.5.2 Wholesaler Markup.......................................................................................................... 6-8

6.5.3 Mechanical Contractor Markups.................................................................................... 6-10

6.5.3.1 Aggregate Markups for Mechanical Contractors......................................... 6-10

6.5.3.2 Markups for Mechanical Contractors in the Replacement and New 

Construction Markets................................................................................... 6-11

6.5.4 General Contractor Markups.......................................................................................... 6-12

6.6 DERIVATION OF CENSUS REGIONS MARKUPS.................................................. 6-15

6.6.1 Estimation of Wholesaler Markups ............................................................................... 6-15

6.6.2 Estimation of Mechanical Contractor Markups............................................................. 6-17

6.6.3 Estimation of General Contractor Markups................................................................... 6-19

6.7 SALES TAX .................................................................................................................. 6-21

6.8 OVERALL MARKUPS................................................................................................. 6-23

LIST OF TABLES

Table 6.5.1 Manufacturer Markups by Commercial Packaged Boiler Equipment Class....... 6-8

Table 6.5.2 Wholesaler Expenses and Markups..................................................................... 6-9

Table 6.5.3 Mechanical Contractor Expenses and Markups Based on Census Bureau 

Data .................................................................................................................... 6-10

Table 6.5.4 Baseline Markup, All Mechanical Contractors.................................................. 6-11

Table 6.5.5 Baseline Markups for the Replacement and New Construction Markets, 

All Mechanical Contractors............................................................................... 6-12

Table 6.5.6 Markups for the Replacement and New Construction Markets......................... 6-12

Table 6.5.7 Commercial Building General Contractor Expenses and Markups................... 6-13

Table 6.5.8 Residential Building General Contractor Expenses and Markups..................... 6-14

Table 6.6.1 Regional Wholesaler Markups for Commercial Packaged Boilers in

Commercial Application.................................................................................... 6-16

Table 6.6.2 Regional Wholesaler Markups for Commercial Packaged Boilers in 

Residential Application...................................................................................... 6-17

Table 6.6.3 Population-Weighted Mechanical Contractor Markups for Commercial 

Packaged Boilers in Commercial Applications ................................................. 6-18

Table 6.6.4 Population-Weighted Mechanical Contractor Markups for Commercial 

Packaged Boilers in Residential Applications................................................... 6-19
6-ii

Table 6.6.5 General Contractor Markups for Commercial Packaged Boilers in 

Commercial Applications .................................................................................. 6-20

Table 6.6.6 General Contractor Markups for Commercial Packaged Boilers in 

Residential Applications.................................................................................... 6-21

Table 6.7.1 Average Sales Tax Rates by CBECS Region .................................................... 6-22

Table 6.7.2 Average Sales Tax Rates by RECS Region....................................................... 6-23

Table 6.8.1 Summary of Overall Markups for Small and Large Commercial Packaged 

Boilers................................................................................................................ 6-25

Table 6.8.2 Summary of Total Markup by Commercial Packaged Boiler Equipment 

Class................................................................................................................... 6-26

LIST OF FIGURES

Figure 6.2.1 Distribution Channels for Commercial Packaged Boilers................................... 6-3
6-1

CHAPTER 6. MARKUPS ANALYSIS

6.1 INTRODUCTION

To carry out its analyses of markups for commercial packaged boilers, the U.S. 

Department of Energy (DOE) determines the cost to the commercial consumer of baseline 

equipment and the cost of more efficient units the commercial consumer would purchase under

new energy conservation standards. DOE calculates such costs based on engineering estimates of 

manufacturing costs plus appropriate markups for the various distribution channels for 

commercial packaged boilers. 

For wholesalers and contractors, DOE estimates a baseline markup and an incremental 

markup. DOE defines a baseline markup as a multiplier that converts the manufacturer selling 

price (MSP) of equipment with baseline efficiency to the commercial consumer 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 manufacturer selling price of higher efficiency 

equipment to the commercial consumer purchase price for the same equipment. Because

companies mark up the price at each point in the distribution channel, both baseline and 

incremental markups are dependent on the distribution channel, as described below in section 

6.2. 

Generally, companies mark up the price of equipment to cover their business costs and 

profit margin. In financial statements, gross margin is the difference between the company 

revenue and the company cost of sales or cost of goods sold (CGS). The gross margin takes 

account of the expenses of companies in the distribution channel, including overhead costs (e.g., 

sales, general, and administration); research and development (R&D) and interest expenses; 

depreciation; and taxes—and company profits. For sales of equipment to contribute positively to 

company cash flow, the equipment’s markup must be greater than the corporate gross margin. 

Certain equipment could command lower or higher markups, depending on company expenses 

associated with that particular equipment and the degree of market competition. 

6.2 DISTRIBUTION CHANNELS

The appropriate markups for determining commercial consumer equipment prices depend 

on the type of distribution channels through which the equipment moves from manufacturers to 

purchasers. In the case of commercial packaged boilers, the majority of them are purchased for 

commercial use, but a small fraction of commercial packaged boilers are purchased to be 

installed in residential buildings. DOE estimates that 94.5 percent of total commercial packaged 

boiler shipments are to commercial applications and 5.5 percent to residential applications. 

Hence, DOE calculates the markups separately for both commercial and residential applications

of commercial packaged boilers.

Within each application, there are two primary types of markets describing the way most 

equipment passes from the manufacturer to the commercial consumer: (1) commercial packaged 
6-2

boilers installed in replacement markets or by new owners, and (2) commercial packaged boilers

that are installed in new construction. Depending on the rating and capacity of a commercial 

packaged boiler, the distribution channels for replacement and new construction markets can 

vary slightly between small boilers and large boilers.

In the replacement distribution channel for small boilers, the manufacturer generally sells 

the equipment to a wholesaler, who in turn sells it to a mechanical contractor, who in turn sells it 

to the commercial consumer. The new construction distribution channel for small boilers 

includes an additional link in the chain—the general contractor. In the new construction 

distribution channel, the manufacturer sells the equipment to a wholesaler, who in turn sells it to 

a mechanical contractor, who in turn sells it to a general contractor then to the commercial 

consumer. 

The replacement and new construction distribution channels for a large boiler with a 

capacity above 2.5 million Btu/hr is very similar to that for a small boiler, but replaces the 

wholesaler with a manufacturer’s representative. Manufacturers usually sell large commercial 

packaged boilers through partnered representatives who are specialized in the application of 

large boilers and have established strong ties with the clientele. The role of the manufacturer’s 

representative is similar to the wholesaler in distribution channel for small boilers. Even though 

the manufacturer’s representative may receive a discount from the partnered manufacturers, the 

other market participants may redistribute the profit throughout the distribution channel. Because 

DOE does not have enough information at this point to estimate separate markups for 

manufacturer’s representatives, DOE assumes that the manufacturer’s representative markup is 

the same as the wholesaler markup.

In addition to these conventional distribution channels, DOE also considers an additional 

distribution channel where the manufacturer sells boilers to the commercial customer directly 

through a national account under both replacement and new construction markets. This national 

account distribution channel is applicable when the commercial consumer orders a customized 

boiler directly from a manufacturer, accounting for approximately 17.5 percent of the total 

commercial packaged boiler market.a Figure 6.2.1 illustrates the main distribution channels for 

both small and large commercial packaged boilers. 

 

a The market structure for commercial packaged boilers is very similar to that for commercial air conditioners. See 

Chapter 7, “Markups for Equipment Price Determination,” in the 2004 Commercial Air Conditioners Advanced 

Notice of Proposed Rulemaking technical support document: 

http://www1.eere.energy.gov/buildings/appliance_standards/commercial/pdfs/cuac_tsd_chp_7.pdf [Docket No. 

EERE-2006-STD-0103]
6-3

 Replacement and New Owner:

 

 

New Construction:

Figure 6.2.1 Distribution Channels for Commercial Packaged 

Boilers

6.3 APPROACH FOR MANUFACTURER MARKUP

DOE uses manufacturer markups to transform a manufacturer’s production cost into the

manufacturer selling price. Detailed methodology to derive manufacturer markups are described 

in section 5.9 of the engineering analysis chapter.

6.4 APPROACH FOR WHOLESALER AND CONTRACTOR MARKUPS

DOE examines how wholesaler and contractor markups may change in response to 

changes in commercial packaged boiler efficiency levels and other factors. Using available data, 

DOE estimates that there are differences between incremental markups on incremental

equipment costs of higher efficiency equipment and the baseline markup on direct business costs

of equipment with baseline efficiency.

DOE derives wholesaler and contractor markups from three key assumptions about the 

costs associated with commercial packaged boilers. In general, DOE bases the wholesaler and 

mechanical contractor markups on firm-level income statement data and general contractor 

markups on U.S. Census Bureau data for the residential building construction industry. DOE 

Manufacturer

Wholesaler/ 

Manufacturer’s 

Representative

Mechanical

Contractor

Commercial 

Consumer

Mechanical 

Contractor

General 

Contractor

Commercial 

Consumer Manufacturer

Manufacturer National Account

Commercial 

Consumer

Manufacturer National Account

Commercial 

Consumer

Wholesaler/ 

Manufacturer’s 

Representative
6-4

obtains income statements about a firm from the Heating, Air-conditioning & Refrigeration 

Distributors International (HARDI) 2013 Profit Report, and from the Air Conditioning 

Contractors of America (ACCA) 2005 Financial Analysis.1, 2 HARDI and ACCA are trade 

associations representing wholesalers and mechanical contractors, respectively. DOE uses the 

financial data from the 2007 U.S. Census of Business for developing general contractor markups 

in the same form as the income statement data for wholesalers and mechanical contractors. These 

income statements break down the components of all costs incurred by firms that supply and 

install heating and air-conditioning equipment.b The key assumptions used to estimate markups 

using these financial data are:

1. The firm income statements faithfully represent the various average costs incurred by 

firms distributing and installing commercial packaged boilers.

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

MSP of commercial packaged boilers (variant costs), and (2) costs that do not vary with 

the MSP of commercial packaged boilers (invariant costs).

3. Overall, wholesale and contractor prices for commercial packaged boilers vary in 

proportion to the wholesaler and contractor costs for commercial packaged boilers

included in the income statements.

In support of the first assumption, 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 and contractors 

tend to handle multiple commodity lines, the data provide the most accurate available indication 

of expenses associated with commercial packaged boilers.

Information obtained from the trade literature, selected heating, ventilating, and airconditioning (HVAC) wholesalers, contractors, and consultants tends to support the second 

assumption about cost categories. The gathered information indicates that wholesale and 

contractor markups vary according to the quantity of labor and materials used to distribute and 

install the equipment. 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).

In support of the third assumption, the HVAC wholesaler and contractor industry is 

competitive, and commercial consumer demand for 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 firms listed in the 2007 Census indicates the competitive nature of 

the market. For example, there are more than 700 manufacturers of HVAC equipment, 5,300 

wholesalers of heat pumps and air-conditioning equipment, more than 170,000 general 

residential contractors, 36,000 commercial and institutional building contractors, and 91,000 

HVAC contractors listed in the 2007 Census.3, 4, 5, 6 Following standard economic theory, 

 b The reports refer to wholesalers and mechanical contractors who handle multiple commodity lines.
6-5

competitive firms facing inelastic demand either set prices in line with costs or quickly go out of 

business.7

DOE concludes that markups for more-efficient equipment are unlikely to be 

proportional to all direct costs. When the wholesaler’s purchase price of equipment increases, for 

example, only a fraction of a business’ expenses increases, while the remainder may stay

relatively constant. For example, if the unit price of a commercial packaged boiler unit increases 

by 30-percent due to improved efficiency, it is unlikely that the cost of secretarial support in an 

administrative office will increase by 30-percent also. Therefore, DOE assumes that incremental 

markups cover only those costs that scale with a change in the MSP (variant costs).

6.4.1 Wholesaler Markup 

In view of the above assumptions, DOE develops baseline and incremental markups for 

wholesalers using the firm income statement from the HARDI 2013 Profit Report (appendix 6-

A.1). The baseline markups cover the wholesaler’s costs (both invariant costs and variant costs). 

Here, variant costs are defined as costs that likely vary in proportion to the change in MSP 

induced by increased efficiency standards; in contrast, invariant costs are defined as costs that 

are unlikely to vary in proportion to the change in MSP due to increased efficiency standards.

DOE calculates the baseline markup for wholesalers using the following equation:

WHOLE

WHOLE WHOLE WHOLE

WHOLE

WHOLE WHOLE

BASE CGS

CGS IVC VC

CGS

CGS GM MU+ ( + ) = + =

Eq. 6.1

Where:

MUBASE = baseline wholesaler markup, 

CGSWHOLE = wholesaler cost of goods sold,

GMWHOLE = wholesaler gross margin, 

IVCWHOLE = wholesaler invariant costs, and

VCWHOLE = wholesaler variant costs.

Incremental markups are coefficients that relate the change in the MSP of more energyefficient models, or the equipment that meets the requirements of new energy conservation 

standards, to the change in the wholesaler sales price. Incremental markups cover only those 

costs that scale with a change in the MSP (variant costs, VC). DOE calculates the incremental 

markup (MUINCR) for wholesalers using the following equation:

WHOLE

WHOLE WHOLE

INCR CGS

CGS VC MU + =

Eq. 6.2

Where:

MUINCR = incremental wholesaler markup,
6-6

CGSWHOLE = wholesaler cost of goods sold, and

VCWHOLE= wholesaler variant costs.

6.4.2 Mechanical and General Contractor Markups

The type of financial data used to estimate markups for wholesalers is also available for 

mechanical contractors and general contractors from the 2007 Economic Census and ACCA 

2005 Financial Analysis. To estimate mechanical contractor markups for commercial packaged 

boilers, DOE collects financial data from the Plumbing and HVAC Contractors (NAICS 23822) 

series from the 2007 Economic Census and from ACCA 2005 Financial Analysis. To estimate 

general contractor markups for commercial packaged boilers in commercial applications, DOE 

collects data from the 2007 Economic Census Commercial Building Construction series (NAICS 

236220). To estimate general contractor markups for commercial packaged boilers in residential 

applications, DOE collects data from the 2007 Economic Census Residential Building 

Construction series, which is the aggregation of New Single-Family General Contractors

(NAICS 236115), New Multifamily Housing Construction (NAICS 236116), New Housing 

Operative Builders (NAICS 236117), and Residential Remodelers (NAICS 236118). 

ACCA financial data provide gross margin (GM) as percent of sales for the mechanical 

contractor industry. For mechanical contractors, the baseline markup can be derived from the 

ACCA data with the following equation:

(%) (%)

(%)

Sales GM

Sales MUBASE − =

Eq. 6.3

The U.S. Census data include the number of establishments, payroll for construction 

workers, value of construction, cost of materials, and cost of subcontracted work at both state 

and national levels. DOE calculates the baseline markup for mechanical contractors and general 

contractors using the following equation:

Pay MatCost SubCost

V MU CONSTRUCT

BASE

+ + =

Eq. 6.4

Where:

MUBASE = baseline mechanical contractor or general contractor markup,

VCONSTRUCT = value of construction,

Pay = payroll for construction workers,

MatCost = cost of materials, and

SubCost = cost of subcontracted work.
6-7

Similarly, DOE estimates the incremental mechanical contractor and general contractor 

markups by marking up those costs that scale with a change in the MSP (variant costs, VC) for 

more energy-efficient equipment. As stated previously, DOE assumes a division of costs 

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

those that do (other operating expenses and profit). Hence, DOE categorizes the Census cost data 

in each major cost category and estimated markups using the following equation: 

CONT

CONT CONT

INCR CGS

CGS VC MU + =

Eq. 6.5

Where:

MUINCR = incremental contractor markup,

CGSCONT = contractor cost of goods sold, and

VCCONT = contractor variant costs.

6.5 DERIVATION OF MARKUPS

6.5.1 Manufacturer Markup

The methodology DOE uses to determine the manufacturer markups for commercial 

packaged boilers is similar to the methodology described in chapter 5 of the Residential Furnace

and Central Air-Conditioning Equipment Direct Final Rule Technical Support Document

(TSD).c DOE uses U.S. Security and Exchange Commission (SEC) 10-K reports covering the 

period from 2008 to 2012 from publicly owned commercial packaged boiler manufacturing 

companies to estimate manufacturer markups. Table 6.5.1 presents manufacturer markups for the 

16 different equipment classes considered in this analysis.

 c The technical support document for the direct final rule for HVAC products is available at the following website: 

http://www.regulations.gov/#!documentDetail;D=EERE-2011-BT-STD-0011-0012
6-8

Table 6.5.1 Manufacturer Markups by Commercial Packaged Boiler Equipment Class

Equipment Class Baseline Markup

Natural Draft Gas-Fired Hot Water Commercial Packaged Boiler ≥300,000 Btu/hr 

and ≤2,500,000 Btu/hr

1.41

Natural Draft Gas-Fired Hot Water Commercial Packaged Boiler >2,500,000 Btu/hr 1.41

Natural Draft Oil-Fired Hot Water Commercial Packaged Boiler ≥300,000 Btu/hr 

and ≤2,500,000 Btu/hr

1.41

Natural Draft Oil-Fired Hot Water Commercial Packaged Boiler >2,500,000 Btu/hr 1.41

Natural Draft Gas-Fired Steam Commercial Packaged Boiler ≥300,000 Btu/hr and 

≤2,500,000 Btu/hr

1.41

Natural Draft Gas-Fired Steam Commercial Packaged Boiler >2,500,000 Btu/hr 1.41

Natural Draft Oil-Fired Steam Commercial Packaged Boiler ≥300,000 Btu/hr and 

≤2,500,000 Btu/hr

1.41

Natural Draft Oil-Fired Steam Commercial Packaged Boiler >2,500,000 Btu/hr 1.41

Mechanical Draft Gas-Fired Hot Water Commercial Packaged Boiler ≥300,000 

Btu/hr and ≤2,500,000 Btu/hr

1.41

Mechanical Draft Gas-Fired Hot Water Commercial Packaged Boiler >2,500,000 

Btu/hr

1.41

Mechanical Draft Oil-Fired Hot Water Commercial Packaged Boiler ≥300,000 

Btu/hr and ≤2,500,000 Btu/hr

1.41

Mechanical Draft Oil-Fired Hot Water Commercial Packaged Boiler >2,500,000 

Btu/hr

1.41

Mechanical Draft Gas-Fired Steam Commercial Packaged Boiler ≥300,000 Btu/hr 

and ≤2,500,000 Btu/hr

1.41

Mechanical Draft Gas-Fired Steam Commercial Packaged Boiler >2,500,000 Btu/hr 1.41

Mechanical Draft Oil-Fired Steam Commercial Packaged Boiler ≥300,000 Btu/hr 

and ≤2,500,000 Btu/hr

1.41

Mechanical Draft Oil-Fired Steam Commercial Packaged Boiler >2,500,000 Btu/hr 1.41

6.5.2 Wholesaler Markup

Wholesalers reported median data in a confidential survey that HARDI conducted of 

member firms. In the survey, HARDI itemizes 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 6-A.1. Table 6.5.2

below summarizes them at the notational aggregated level as cost-per-dollar sales revenue in the 

first data column. These wholesaler markups are applicable to both small and large commercial 

packaged boilers in both commercial and residential applications. 
6-9

Table 6.5.2 Wholesaler Expenses and Markups

Descriptions

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

Wholesaler Baseline Markup (MUWHOLE BASE) 1.353

Incremental Markup (MUWHOLE INCR) 1.101

Source: Heating, Air Conditioning & Refrigeration Distributors International. 2013. 2013 Profit Report (2012 Data).

In this case, direct equipment expenses (cost of goods sold) represent about $0.74 per 

dollar sales revenue, so for every $1 wholesalers take in as sales revenue, $0.74 is used to pay 

the direct equipment costs. Labor expenses represent $0.15 per dollar sales revenue, occupancy 

expenses represent $0.04, other operating expenses represent $0.05, and profit accounts for $0.02

per dollar sales revenue.

DOE converts the expenses per dollar sales into expenses per dollar cost of goods sold, 

by dividing each figure in the first data column by $0.74 (i.e., cost of goods sold per dollar of 

sales revenue). The data in the second column show that, for every $1.00 the wholesaler spends 

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

occupancy expenses, $0.070 for other operating expenses, and $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 (MUWHOLE BASE) is 1.353 ($1.353 ÷ $1.00). 

DOE also uses the data in the second column to estimate the incremental markup. The 

incremental markup depends on which of the costs in Table 6.5.2 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. 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 and operating profit of $0.075, which when 

divided by 73.9 cents in cost of goods sold yields an increase of $0.101, giving a wholesaler 

incremental markup (MUWHOLE INCR) of 1.101. See appendix 6-A.1 for cost details.
6-10

6.5.3 Mechanical Contractor Markups 

6.5.3.1 Aggregate Markups for Mechanical Contractors

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

HVAC Contractors (NAICS 23822) sector, which contains national average sales and cost data,

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

construction workers. It also provides the cost breakdown of gross margin, including labor 

expenses, occupancy expenses, other operating expenses, and profit. The gross margin provided 

by the U.S. Census is disaggregated enough that DOE is able to determine the invariant (labor 

and occupancy expenses) and variant (other operating expenses and profits) costs for this 

particular sector. DOE uses the aforementioned equation to estimate baseline and incremental 

markups. The markup results representing the plumbing and HVAC contractor industry at the 

national aggregated level are presented in Table 6.5.3. (Appendix 6-A.2 contains the full set of 

data.)

Table 6.5.3 Mechanical Contractor Expenses and Markups Based on Census Bureau 

Data

Description

Mechanical Contractor Expenses 

or Revenue

Per Dollar

Sales Revenue

$

Per Dollar 

Cost of Goods

$

Direct Cost of Equipment Sales: Cost of goods sold 0.68 1.00

Labor Expenses: Salaries (indirect) and benefits 0.18 0.26

Occupancy Expense: Rent, maintenance, and utilities 0.02 0.03

Other Operating Expenses: Depreciation, advertising, 

and insurance.

0.08 0.12

Net Profit Before Taxes 0.04 0.06

Baseline Markup (MUMECH BASE): Revenue per dollar cost of goods 1.48

Incremental Markup (MUMECH INCR): Increased revenue per dollar 

increase in cost of goods sold

1.18

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

Construction: Industry Series, Preliminary Detailed Statistics for Establishments, 2007.

The first data column in Table 6.5.3 provides the cost of goods sold and a list of gross 

margin components as expenses per dollar of sales revenue. As shown in the table, the direct cost 

of sales represents about $0.68 per dollar sales revenue to the mechanical contractor, and the 

gross margin totals $0.32 per dollar sales revenue. DOE converts these expenses per dollar sales 

into revenue per dollar cost of goods sold by dividing each figure in the first data column by 

$0.68. 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 $0.48 to cover the other 

costs. This totals $1.48 in sales revenue earned for every $1.00 spent on equipment costs. This is 

equivalent to a baseline markup (MUMECH CONT BASE) of 1.48 for mechanical contractors. 
6-11

DOE is also able to use the data in the second column of Table 6.5.3 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 $1.48, implying that the incremental markup is 1.48 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 are invariant and the 

other operating costs and profit scale with the equipment price (i.e., are variant). In this case, for 

a $1.00 increase in the equipment price, the general contractor price will increase by $1.18, 

giving a general contractor incremental markup (MUMECH CONT INCR) of 1.18.

6.5.3.2 Markups for Mechanical Contractors in the Replacement and New 

Construction Markets

DOE derives the baseline and incremental markups for both replacement and new 

construction markets using the 2007 Economic Census industrial cost data supplemented with 

the most recent ACCA 2005 financial data.8, 2 The 2007 Economic Census provides sufficient 

detailed cost breakdown for the Plumbing and HVAC Contractors (NAICS 23822) sector so that 

DOE is able to estimate baseline and incremental markups for mechanical contractors. However, 

the 2007 Economic Census does not separate the mechanical contractor market into replacement 

and new construction markets. In order to calculate markups for these two markets, DOE utilized 

2005 ACCA financial data, which reports gross margin data for the entire mechanical contractor 

market and for both the replacement and new construction markets. 

The HVAC contractors, defined here as mechanical contractors, reported median cost 

data in an ACCA 2005 financial analysis of the HVAC industry. These data are shown in Table 

6.5.4.

Table 6.5.4 Baseline Markup, All 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 0.7286 1.00

Gross Margin: Labor, occupancy, operating 

expenses, and profit

0.2714 0.372

Revenue: Baseline revenue earned per dollar cost of goods 1.372

Baseline Markup (MUMECH CONT BASE) 1.372

Source: Air Conditioning Contractors of America. 2005. Financial Analysis for the HVACR Contracting Industry.

Table 6.5.5 summarizes the gross margin and resulting baseline markup data for all 

mechanical contractors that serve the replacement and new construction markets. 
6-12

Table 6.5.5 Baseline Markups for the Replacement and New Construction Markets, All 

Mechanical Contractors

Description

Contractor Expenses or Revenue by Market Type

Replacement New Construction

Per Dollar

Sales 

Revenue

$

Per Dollar 

Cost of 

Goods

$

Per Dollar

Sales 

Revenue

$

Per Dollar 

Cost of 

Goods

$

Direct Cost of Equipment Sales: 

Cost of goods sold 0.7031 1.000 0.745 1.000

Gross Margin: Labor, occupancy, 

operating expenses, and profit 0.2969 0.422 0.255 0.342

Baseline Markup (MUMECH 

CONT BASE): Revenue per 

dollar cost of goods

NA 1.422 NA 1.342

% Difference from Aggregate 

Mechanical Contractor Baseline 

MU

NA 3.63% NA -2.20%

Source: Air Conditioning Contractors of America. 2005. Financial Analysis for the HVACR Contracting Industry.

Using the baseline markup data from Table 6.5.5 and results from Table 6.5.4, DOE 

calculates that the baseline markups for the replacement and new construction markets are 3.63-

percent higher and 2.20-percent lower, respectively, than for all mechanical contractors serving 

all markets.

The markup deviations (i.e., 3.63-percent higher and 2.20-percent lower for the 

replacement and new construction markets, respectively) derived for all mechanical contractors 

were then applied to the baseline markup of 1.48 and the incremental markup of 1.18 estimated 

for the Plumbing and HVAC Contractors (NAICS 23822) sector in Table 6.5.3. DOE assumes

that this deviation applies equally to the baseline and incremental markups calculated from the 

2007 Economic Census. The results of the baseline and incremental markups for the replacement 

and new construction markets served by mechanical contractors are shown in Table 6.5.6.

Table 6.5.6 Markups for the Replacement and New Construction Markets

Baseline Markup Incremental Markup

Replacement Market 1.53 1.22

New Construction Market 1.44 1.16

6.5.4 General Contractor Markups 

DOE derives markups for general contractors from U.S. Census Bureau data for the 

commercial building construction and residential building construction sector to reflect the 

commercial and residential application of commercial packaged boilers.

9 The commercial 

construction sector includes establishments primarily responsible for the construction of 
6-13

commercial and institutional buildings, whereas the residential construction sector includes 

establishments primarily engaged in construction work, including new construction work, 

additions, alterations, and repairs of residential buildings.

10 The U.S. Census Bureau data for the 

construction sector include detailed statistics for establishments with payrolls, similar to the data 

reported by HARDI for wholesalers. The primary difference is that the U.S. Census Bureau 

reports itemize 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 

assumes that the total dollar values that the U.S. Census Bureau reports, once converted to a 

percentage basis, represent revenues and expenses for an average or typical contracting business. 

Similar to the data for wholesalers, Table 6.5.7 summarizes the expenses for general contractors 

in commercial building construction at the national aggregated level as expenses per dollar sales 

revenue in the first data column. (Table 6-A.3.1 in appendix 6-A.3 contains the full set of data.)

Table 6.5.7 Commercial Building General Contractor Expenses and Markups

Description

Wholesale Firm Expenses or 

Revenue

Per Dollar

Sales Revenue

$

Per Dollar 

Cost of 

Goods

$

Direct Cost of Equipment Sales: Cost of goods sold 0.76 1

Labor Expenses: Salaries (indirect) and benefits 0.08 0.10

Occupancy Expense: Rent, maintenance, and utilities 0.01 0.01

Other Operating Expenses: Depreciation, advertising, and 

insurance.

0.03 0.04

Net Profit Before Taxes 0.12 0.15

Baseline Markup (MUGEN CONT BASE): Revenue per dollar cost of goods 1.31

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

increase cost of goods sold

1.19

Source: U.S. Census Bureau. 2007. Sector 236220 (Commercial Building Construction). Construction: Industry 

Series: Preliminary Detailed Statistics for Establishments: 2007.

As shown in the first column, the direct cost of sales represents about $0.76 per dollar 

sales revenue to the general contractor. Labor expenses represent $0.08 per dollar sales revenue, 

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

$0.03, and profit makes up $0.12 per dollar sales revenue.

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

by dividing each figure in the first data column by $0.76. 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, $0.10 to cover labor costs, $0.01 to cover 

occupancy expenses, $0.04 for other operating expenses, and $0.15 in profits. This totals $1.31 

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

baseline markup (MUGCONTRACT_ BASE) is 1.31.
6-14

DOE is also able to use the data in column two of Table 6.5.7 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 $1.48, implying that the incremental markup is 1.48, 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 are invariant, while 

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

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

$1.19, giving a general contractor incremental markup (MUGCONTRACT_INCR) of 1.19.

Table 6.5.8 summarizes the expenses for general contractors in residential building 

construction at the national aggregated level as expenses per dollar sales revenue in the first data 

column. (Table 6-A.3.2 in appendix 6-A.3 contains the full set of data.)

Table 6.5.8 Residential Building General Contractor Expenses and Markups

Description

General Contractor Expenses 

or Revenue

Per Dollar

Sales Revenue

$

Per Dollar 

Cost of 

Goods

$

Direct Cost of Equipment Sales: Cost of goods sold 0.68 1.00

Labor Expenses: Salaries (indirect) and benefits 0.08 0.12

Occupancy Expense: Rent, maintenance, and utilities 0.01 0.01

Other Operating Expenses: Depreciation, advertising, and 

insurance.

0.06 0.09

Net Profit Before Taxes 0.17 0.25

Baseline Markup (MUGEN CONT BASE): Revenue per dollar cost of goods 1.47

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

increase in cost of goods sold

1.34

Source: U.S. Census Bureau. 2007. Residential Building Construction. Sector 23: 236115-236118. Construction: 

Industry Series: Preliminary Detailed Statistics for Establishments: 2007.

As shown in the first column, the direct cost of sales represents about $0.68 per dollar 

sales revenue to the general contractor. Labor expenses represent $0.08 per dollar sales revenue, 

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

$0.03, and profit makes up $0.20 per dollar sales revenue.

DOE converts the expenses per dollar sales into revenue per dollar cost of goods sold, by 

dividing each figure in the first data column by $0.68. The data in the second column 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, $0.12 to cover labor costs, $0.01 to cover 

occupancy expenses, $0.09 for other operating expenses, and $0.25 in profits. This totals $1.47 

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

baseline markup (MUGEN CONT BASE) is 1.47.
6-15

DOE is also able to use the data in the second column in Table 6.5.8 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 $1.47, implying that the incremental markup is 1.48, 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 are invariant and the 

other operating costs and profit scale with the equipment price (i.e., are variant). In this case, for 

a $1.00 increase in the equipment price, the general contractor price will increase by $1.34, 

giving a general contractor incremental markup (MUGEN CONT INCR) of 1.34.

6.6 DERIVATION OF CENSUS REGIONS MARKUPS

In this analysis, DOE considers 16 different commercial packaged boiler equipment

classes. DOE assumes a market saturation rate for each equipment class which varies by 

geographical region that is defined by the Commercial Building Energy Consumption Survey 

(CBECS), and Residential Energy Consumption Survey (RECS), and is based on the population 

projection for the year of 2019.11, 12 Therefore, regional markups are calculated for each 

commercial packaged boiler equipment class in both commercial and residential applications.

Wholesalers and mechanical and general contractors in the commercial packaged boiler

industry are divided into the nine regions provided by the latest CBECS for the commercial 

building survey and also are divided into the 30 regions provided by the latest RECS for the 

residential application.

d Regional baseline and incremental markups are derived using the

region/state level data from the 2013 HARDI Profit Report and the 2007 Economic Census. 

6.6.1 Estimation of Wholesaler Markups

Based on the regional income statement from the 2013 HARDI Profit Report, DOE 

estimates baseline and incremental markups for the seven HARDI regions (Northeastern, MidAtlantic, Southwestern, Great Lakes, Central, Southwestern, and Western) using the 

methodology shown in Table 6.5.2. Next, each state in each region is assigned the HARDI 

regional baseline and incremental markups for the region to which it belongs. DOE assigns all 

states to one of the nine CBECS regions in the analysis and then calculates population-weighted 

baselines and incremental markup averages for each region. The results are summarized in Table 

6.6.1

 d RECS 2009 provides 27 regions (also called reportable domains). The 27th region originally includes Oregon, 

Washington, Alaska, and Hawaii. Alaska and Hawaii are subdivided into separate regions (28 and 29, respectively), 

based on cooling and heating degree days. In addition, region 14 originally includes West Virginia, which has been 

disaggregated into region 30 based on cooling and heating degree days. See appendix 7-A for more details.
6-16

Table 6.6.1 Regional Wholesaler Markups for Commercial Packaged Boilers in 

Commercial Application 

CBECS 

Regions Census Divisions Baseline MU

Incremental 

MU

1 New England 1.366 1.072

2 Middle Atlantic 1.360 1.084

3 East North Central 1.358 1.104

4 West North Central 1.364 1.115

5 South Atlantic 1.337 1.096

6 East South Central 1.335 1.097

7 West South Central 1.348 1.112

8 Mountain 1.391 1.111

9 Pacific 1.404 1.110

In residential applications, DOE assigns all states to one of the 30 RECS regions in the 

analysis and then calculates population-weighted baselines and incremental markup averages for 

each region in the residential applications. The results are summarized in Table 6.6.2.
6-17

Table 6.6.2 Regional Wholesaler Markups for Commercial Packaged Boilers in 

Residential Application 

RECS 

Regions State(s) Baseline MU

Incremental 

MU

1 Connecticut, Maine, New Hampshire, Rhode Island, Vermont 1.366 1.072

2 Massachusetts 1.366 1.072

3 New York 1.366 1.072

4 New Jersey 1.355 1.092

5 Pennsylvania 1.354 1.095

6 Illinois 1.364 1.115

7 Indiana, Ohio 1.353 1.097

8 Michigan 1.353 1.097

9 Wisconsin 1.364 1.115

10 Iowa, Minnesota, North Dakota, South Dakota 1.364 1.115

11 Kansas, Nebraska 1.364 1.115

12 Missouri 1.364 1.115

13 Virginia 1.355 1.092

14 Delaware, District of Columbia, Maryland 1.355 1.092

15 Georgia 1.330 1.097

16 North Carolina, South Carolina 1.330 1.097

17 Florida 1.330 1.097

18 Alabama, Kentucky, Mississippi 1.338 1.097

19 Tennessee 1.330 1.097

20 Arkansas, Louisiana, Oklahoma 1.348 1.112

21 Texas 1.348 1.112

22 Colorado 1.364 1.115

23 Idaho, Montana, Utah, Wyoming 1.401 1.110

24 Arizona 1.404 1.110

25 Nevada, New Mexico 1.383 1.110

26 California 1.404 1.110

27 Oregon, Washington 1.404 1.110

28 Alaska 1.404 1.110

29 Hawaii 1.404 1.110

30 West Virginia 1.353 1.097

6.6.2 Estimation of Mechanical Contractor Markups

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

HVAC Contractors (NAICS 23822) sector, which contains state-level sale and cost data,

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

construction workers. By using the equations mentioned in Section 6.4.2. DOE is able to 

estimate baseline markups for each state. Because the Census does not provide more 
6-18

disaggregated cost data, DOE is not able to differentiate between invariant and variant cost. 

Alternatively, DOE calculates the national baseline and incremental markups (Table 

6.6.3) and finds that the incremental markups are around 20-percent lower than the baseline 

markups. DOE further derives the state-level incremental markups by applying this ratio to the 

baseline markups in each state, assuming that this deviation applies equally to all states. (Table 

6-A.4.1 in appendix 6-A.4 contains the full set of data.)

To estimate the baseline and incremental markups for both replacement and new 

construction markets for each state, DOE applies the markup deviations (i.e., 3.6-percent higher 

and 2.2-percent lower for the replacement and new construction markets, respectively), derived 

above in section 6.5.3.2, to the statewide baseline and incremental markups. DOE assumes that 

this deviation of replacement and new construction markets applies equally to the baseline and 

incremental markups. 

In commercial applications, DOE divides all states among the nine CBECS regions and 

then calculates population-weighted average baseline and incremental markups for mechanical 

contractors for each region, as shown in Table 6.6.3.

Table 6.6.3 Population-Weighted Mechanical Contractor Markups for Commercial 

Packaged Boilers in Commercial Applications

Last, DOE divides all states among the 30 RECS regions and then calculates populationweighted average baseline and incremental markups for mechanical contractors for each region

in residential applications, as shown in Table 6.6.4.

CBECS 

Regions

Census Divisions Replacement 

Baseline MU

Replacement 

Incremental 

MU

New 

Construction 

Baseline MU

New 

Construction 

Incremental 

MU

1 New England 1.538 1.231 1.452 1.162

2 Middle Atlantic 1.548 1.238 1.461 1.169

3 East North Central 1.542 1.233 1.455 1.164

4 West North Central 1.489 1.191 1.406 1.124

5 South Atlantic 1.496 1.197 1.412 1.129

6 East South Central 1.497 1.198 1.413 1.131

7 West South Central 1.500 1.200 1.415 1.132

8 Mountain 1.527 1.222 1.441 1.153

9 Pacific 1.598 1.278 1.508 1.206
6-19

Table 6.6.4 Population-Weighted Mechanical Contractor Markups for Commercial 

Packaged Boilers in Residential Applications

6.6.3 Estimation of General Contractor Markups

to derive regional general contractor markups for the commercial building construction 

sector from the 2007 Economic Census, DOE uses the Commercial Building Construction series 

RECS 

Regions State(s) Replacement 

Baseline MU

Replacement 

Incremental 

MU

New 

Construction 

Baseline MU

New 

Construction 

Incremental 

MU

1 Connecticut, Maine, New 

Hampshire, Rhode Island, Vermont 1.547 1.238 1.460 1.168

2 Massachusetts 1.527 1.222 1.441 1.153

3 New York 1.589 1.271 1.499 1.200

4 New Jersey 1.572 1.258 1.484 1.187

5 Pennsylvania 1.468 1.174 1.385 1.108

6 Illinois 1.566 1.252 1.478 1.182

7 Indiana, Ohio 1.551 1.241 1.464 1.171

8 Michigan 1.519 1.215 1.433 1.147

9 Wisconsin 1.499 1.199 1.414 1.131

10 Iowa, Minnesota, North Dakota, 

South Dakota 1.519 1.216 1.434 1.147

11 Kansas, Nebraska 1.450 1.160 1.369 1.095

12 Missouri 1.468 1.175 1.386 1.109

13 Virginia 1.546 1.237 1.459 1.167

14 Delaware, District of Columbia, 

Maryland 1.478 1.183 1.395 1.116

15 Georgia 1.463 1.170 1.381 1.105

16 North Carolina, South Carolina 1.489 1.191 1.405 1.124

17 Florida 1.501 1.201 1.417 1.134

18 Alabama, Kentucky, Mississippi 1.515 1.212 1.430 1.144

19 Tennessee 1.466 1.173 1.384 1.107

20 Arkansas, Louisiana, Oklahoma 1.531 1.225 1.445 1.156

21 Texas 1.487 1.190 1.404 1.123

22 Colorado 1.520 1.216 1.434 1.147

23 Idaho, Montana, Utah, Wyoming 1.480 1.184 1.397 1.117

24 Arizona 1.569 1.255 1.481 1.184

25 Nevada, New Mexico 1.524 1.219 1.438 1.151

26 California 1.595 1.276 1.506 1.204

27 Oregon, Washington 1.568 1.254 1.480 1.184

28 Alaska 1.753 1.402 1.654 1.324

29 Hawaii 1.822 1.458 1.720 1.376

30 West Virginia 1.517 1.213 1.431 1.145
6-20

(NAICS 236220) from the 2007 Economic Census. Similarly, DOE combines four Geographic 

Area Series: (1) New Single-Family General Contractors (NAICS 236115), (2) New Multifamily 

Housing Construction (NAICS 236116), (3) New Housing Operative Builders (NAICS 236117), 

and (4) Residential Remodelers (NAICS 236118) to derive regional general contractor markups 

for the residential application of commercial packaged boilers

Each series consists of statewide cost data required to calculate baseline markups for each 

state, as illustrated in Section 6.4.2. Although there is only a new construction (no replacement) 

channel for general contractors, the same technique shown for mechanical contractors can still be 

employed to estimate regional baseline and incremental markups. First, DOE estimates the 

statewide incremental markups by applying the ratio of national baseline and incremental 

markups (i.e., the national incremental markup is around 9.16- and 8.84-percent lower than the 

national baseline markup in commercial and residential application, respectively) to the baseline 

markups for each state. Last, DOE divides all states among the nine CBECS regions and 30

RECS regions; then calculates population-weighted average baseline and incremental markups

for general contractors for each region in both commercial and residential applications. The final 

results are summarized below in Table 6.6.5 for commercial applications and in Table 6.6.6 for 

residential applications (Table 6-A.4.2 and Table 6-A.4.3 in appendix 6-A.4 contains the full set 

of data.)

Table 6.6.5 General Contractor Markups for Commercial Packaged Boilers in 

Commercial Applications

CBECS 

Regions Census Division Baseline MU

Incremental 

MU

1 New England 1.335 1.212

2 Middle Atlantic 1.421 1.291

3 East North Central 1.315 1.195

4 West North Central 1.284 1.166

5 South Atlantic 1.343 1.220

6 East South Central 1.332 1.210

7 West South Central 1.315 1.195

8 Mountain 1.272 1.155

9 Pacific 1.320 1.199
6-21

Table 6.6.6 General Contractor Markups for Commercial Packaged Boilers in 

Residential Applications

RECS 

Regions State(s) Baseline MU

Incremental 

MU

1 Connecticut, Maine, New Hampshire, Rhode Island, Vermont 1.408 1.275

2 Massachusetts 1.343 1.216

3 New York 1.393 1.261

4 New Jersey 1.503 1.361

5 Pennsylvania 1.362 1.233

6 Illinois 1.589 1.438

7 Indiana, Ohio 1.378 1.248

8 Michigan 1.537 1.392

9 Wisconsin 1.340 1.213

10 Iowa, Minnesota, North Dakota, South Dakota 1.377 1.247

11 Kansas, Nebraska 1.351 1.223

12 Missouri 1.325 1.200

13 Virginia 1.450 1.313

14 Delaware, District of Columbia, Maryland 1.415 1.282

15 Georgia 1.428 1.293

16 North Carolina, South Carolina 1.391 1.259

17 Florida 1.528 1.384

18 Alabama, Kentucky, Mississippi 1.355 1.227

19 Tennessee 1.353 1.225

20 Arkansas, Louisiana, Oklahoma 1.373 1.243

21 Texas 1.499 1.357

22 Colorado 1.499 1.357

23 Idaho, Montana, Utah, Wyoming 1.308 1.184

24 Arizona 1.707 1.546

25 Nevada, New Mexico 1.641 1.486

26 California 1.717 1.555

27 Oregon, Washington 1.464 1.325

28 Alaska 1.854 1.678

29 Hawaii 1.417 1.283

30 West Virginia 1.545 1.398

6.7 SALES TAX

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

consumer price of the equipment. The sales tax is a multiplicative factor which increases the 

commercial consumer equipment price. DOE only applies the sales tax to the commercial 

consumer price of the equipment in the replacement market, not the new construction market. 

The common practice for selling larger commercial appliances, such as commercial packaged 
6-22

boilers in the new construction market, is that general contractors (or builders) bear the added 

sales tax for equipment in addition to the cost of equipment, and then mark up the entire cost in 

the final listing price to commercial consumers. Therefore, no additional sales tax is necessary to 

calculate the commercial consumer equipment price for the new construction market.

DOE derives state and local taxes from data provided by the Sales Tax Clearinghouse.

13

These data represent weighted averages that include county and city rates. DOE then derives

population-weighted average tax values for each CBECS and RECS region to match the regional 

markups for wholesalers and mechanical and general contractors, as shown in Table 6.7.1 and

Table 6.7.2. Detailed sales tax data by each state can be found in appendix 6-A.5.

Table 6.7.1 Average Sales Tax Rates by CBECS Region

CBECS 

Regions Census Divisions Population Projection (2019)

Tax Rate 

(2014) %

1 New England 15,309,528 5.63

2 Middle Atlantic 41,825,909 7.46

3 East North Central 48,208,733 6.90

4 West North Central 21,246,442 7.12

5 South Atlantic 68,442,026 6.27

6 East South Central 18,978,828 8.04

7 West South Central 40,149,965 8.15

8 Mountain 25,557,049 6.53

9 Pacific 56,086,066 7.67

Population-Weighted National Average 7.11
6-23

Table 6.7.2 Average Sales Tax Rates by RECS Region

RECS 

Regions State(s) Population Projection (2019)

Tax Rate 

(2014) %

1 Connecticut, Maine, New Hampshire, Rhode Island, 

Vermont 8,453,982 5.13

2 Massachusetts 6,855,546 6.25

3 New York 19,576,920 8.40

4 New Jersey 9,461,635 6.95

5 Pennsylvania 12,787,354 6.40

6 Illinois 13,236,720 8.05

7 Indiana, Ohio 18,271,066 7.06

8 Michigan 10,695,993 6.00

9 Wisconsin 6,004,954 5.45

10 Iowa, Minnesota, North Dakota, South Dakota 10,353,316 6.88

11 Kansas, Nebraska 4,693,244 7.14

12 Missouri 6,199,882 7.50

13 Virginia 8,917,395 4.00

14 Delaware, District of Columbia, Maryland 7,941,375 5.26

15 Georgia 10,843,753 7.10

16 North Carolina, South Carolina 15,531,866 6.98

17 Florida 23,406,525 6.65

18 Alabama, Kentucky, Mississippi 12,198,158 7.25

19 Tennessee 6,780,670 9.45

20 Arkansas, Louisiana, Oklahoma 11,515,069 8.66

21 Texas 28,634,896 7.95

22 Colorado 5,278,867 6.10

23 Idaho, Montana, Utah, Wyoming 6,285,110 5.32

24 Arizona 8,456,448 7.15

25 Nevada, New Mexico 5,536,624 7.38

26 California 42,206,743 8.45

27 Oregon, Washington 11,692,529 5.66

28 Alaska 774,421 1.30

29 Hawaii 1,412,373 4.40

30 West Virginia 1,801,112 6.10

Population-Weighted National Average 7.11

6.8 OVERALL MARKUPS

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

markups, as well as the sales tax in the case of replacement applications (Table 6.8.1). DOE uses

the overall baseline markup to estimate the commercial consumer equipment price of baseline 

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

baseline models to be equipment sold under existing market conditions (i.e., without new energy 
6-24

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

markup to determine the equipment price for baseline models.

( ) CPPBASE = COSTMFG × MU MFG × MUBASE ×TaxSALES = COSTMFG × MUOVERALL _ BASE

Eq. 6.8.1

Where:

CPPBASE = commercial consumer equipment price for baseline models,

COSTMFG = manufacturer cost for baseline models,

MUMFG = manufacturer markup,

MUBASE = baseline replacement or new home channel markup,

TaxSALES = sales tax (replacement applications only), and

MUOVERALL_BASE = baseline overall markup.

Similarly, DOE uses the overall incremental markup to estimate changes in the 

commercial consumer equipment price, given changes in the manufacturer cost from the baseline 

model cost resulting from an energy conservation standard to raise equipment energy efficiency. 

The total commercial consumer equipment prices for more energy-efficient models are

composed of two components: the commercial consumer equipment price of the baseline model 

and the change in commercial consumer equipment price associated with the increase in 

manufacturer cost to meet the new energy conservation standard. The following equation shows 

how DOE uses the overall incremental markup to determine the commercial consumer

equipment price for more energy-efficient models (i.e., models meeting new energy conservation 

standards). 

( )

BASE MFG OVERALL INCR

STD MFG OVERALL BASE MFG MFG INCR SALES

CPP COST MU

CPP COST MU COST MU MU Tax

_

_

= + D ×

= × + D × × ×

Eq. 6.8.2

Where:

CPPSTD = commercial consumer equipment price for models meeting new energy conservation 

standards,

CPPBASE = commercial consumer equipment price for baseline models, 

COSTMFG = manufacturer cost for baseline models,

ΔCOSTMFG = change in manufacturer cost for more energy-efficient models,

MUMFG = manufacturer markup,

MUINCR = incremental replacement or new home channel markup,

TaxSALES = sales tax (replacement applications only),

MUOVERALL_BASE = baseline overall markup (equipment of manufacturer markup, baseline 

replacement or new home channel markup, and sales tax), and

MUOVERALL_INCR = incremental overall markup.
6-25

National weighted average baseline and incremental markups for each market participant 

are summarized below in Table 6.8.1 for commercial packaged boilers. The values represent the 

weighted-average markups based on the state-level markup values and population projection by 

state as weight. Note that the overall markup values may not equal the product of associated 

markup values shown in Table 6.8.1 because of the rounding. In view of commercial packaged 

boiler shipment forecasts for the year 2019 (see chapter 9 for name abbreviations by equipment 

class), DOE estimates that 4-percent each of SGNDHW boilers and LONDHW boilers, 12-

percent of SONDHW, 70-percent of SGMDHW boilers, 81-percent of LGMDHW boilers, 61-

percent of SOMDHW boilers, and 45-percent of LOMDHW boilers go to new construction. On 

the other hand, 96-percent each of SGNDHW boilers and LONDHW boilers, 88-percent of 

SONDHW boilers, 30-percent of SGMDHW boilers, 19-percent of LGMDHW boilers, 39-

percent of SOMDHW boilers, 55-percent of LOMDHW boilers, and 100-percent of LGNDHW, 

SGNDST, LGNDST, SONDST, LONDST, SGMDST, LGMDST, SOMDST, and LOMDST

boilers go to the replacement market. By weighing the markups by the market shares for each 

type of commercial packaged boiler and market, total markups are listed in Table 6.8.2.

Table 6.8.1 Summary of Overall Markups for Small and Large Commercial Packaged 

Boilers

 Replacement New Construction

Baseline 

Markup

Incremental 

Markup

National 

Account: 

Baseline/ 

Incr. MU 

Baseline 

Markup

Incremental 

Markup

National 

Account: 

Baseline/ 

Incr. MU 

Manufacturer 1.41 1.41

Wholesaler/Manufacturer’s 

Representative 1.36 1.10 1.36/1.10 1.36 1.10 1.36/1.10

Mechanical Contractor 1.53 1.22 - 1.44 1.16 -

General Contractor 

(commercial/residential) - - - 1.33/1.48 1.21/1.34 -

Sales Tax 1.07 - - 1.07

Overall Markup 

(commercial/residential) 3.15 2.04 2.06/1.66 3.69/4.10 2.17/2.40 2.06/1.66
6-26

Table 6.8.2 Summary of Total Markup by Commercial Packaged Boiler Equipment

Class 

Equipment Class Baseline 

Markup

Incremental

Markup

Natural Draft Gas-Fired Hot Water Commercial Packaged 

Boiler ≥300,000 Btu/hr and ≤2,500,000 Btu/hr 3.04 1.99

Natural Draft Gas-Fired Hot Water Commercial Packaged 

Boiler >2,500,000 Btu/hr 2.95 1.97

Natural Draft Oil-Fired Hot Water Commercial Packaged 

Boiler ≥300,000 Btu/hr and ≤2,500,000 Btu/hr 3.24 2.04

Natural Draft Oil-Fired Hot Water Commercial Packaged 

Boiler >2,500,000 Btu/hr 2.99 1.96

Natural Draft Gas-Fired Steam Commercial Packaged Boiler 

≥300,000 Btu/hr and ≤2,500,000 Btu/hr 3.02 1.99

Natural Draft Gas-Fired Steam Commercial Packaged Boiler 

>2,500,000 Btu/hr 2.96 1.97

Natural Draft Oil-Fired Steam Commercial Packaged Boiler 

≥300,000 Btu/hr and ≤2,500,000 Btu/hr 3.05 1.97

Natural Draft Oil-Fired Steam Commercial Packaged Boiler 

>2,500,000 Btu/hr 2.97 1.96

Mechanical Draft Gas-Fired Hot Water Commercial Packaged 

Boiler ≥300,000 Btu/hr and ≤2,500,000 Btu/hr 3.35 2.07

Mechanical Draft Gas-Fired Hot Water Commercial Packaged 

Boiler >2,500,000 Btu/hr 3.31 2.05

Mechanical Draft Oil-Fired Hot Water Commercial Packaged 

Boiler ≥300,000 Btu/hr and ≤2,500,000 Btu/hr 3.54 2.14

Mechanical Draft Oil-Fired Hot Water Commercial Packaged 

Boiler >2,500,000 Btu/hr 3.16 2.00

Mechanical Draft Gas-Fired Steam Commercial Packaged 

Boiler ≥300,000 Btu/hr and ≤2,500,000 Btu/hr 3.02 1.99

Mechanical Draft Gas-Fired Steam Commercial Packaged 

Boiler >2,500,000 Btu/hr 2.96 1.97

Mechanical Draft Oil-Fired Steam Commercial Packaged 

Boiler ≥300,000 Btu/hr and ≤2,500,000 Btu/hr 3.05 1.98

Mechanical Draft Oil-Fired Steam Commercial Packaged 

Boiler >2,500,000 Btu/hr 2.98 1.96
6-27

REFERENCES

1. Heating, Air Conditioning & Refrigeration Distributors International 2013 Profit Report, 

<http://www.hardinet.org/Profit-Report>

2. Air Conditioning Contractors of America (ACCA), Financial Analysis for the HVACR 

Contracting Industry: 2005, 2005. <http://www.acca.org/store/>

3. U.S. Census Bureau, Manufacturing Industry Series: Detailed Statistics for the United 

States: 2007. Air-Conditioning and Warm Air Heating Equipment and Commercial and 

Industrial Refrigeration Equipment Manufacturing. Data set for Sector 31: EC073111, 

2007. <http://www.census.gov/econ/>

4. U.S. Census Bureau, Wholesale Trade: Industry Series: Preliminary Summary Statistics 

for the United States: 2007. HVAC Equipment Merchant Wholesaler. Data set for Sector 

42: EC0742111, 2007. <http://www.census.gov/econ/>

5. U.S. Census Bureau, Data set for Sector 23: EC0723I1: 236115 through 236118 

(Residential Building Construction) and 236220 (Commercial Building Construction), 

Construction: Industry Series, Preliminary Detailed Statistics for Establishments: 2007, 

2007. <http://www.census.gov/econ/>

6. U.S. Census Bureau, Data set for Sector 23, EC0723A1: 238220 (Plumbing, Heating and 

Air-Conditioning Contractors), Construction: Geographic Area Series, Detailed 

Statistics for Establishments, 2007. <http://www.census.gov/econ/>

7. Pindyck, R. S. and D. L. Rubinfeld, Microeconomics. 5th ed. 2000. Prentice Hall: New 

Jersey.

8. U.S. Census Bureau, Plumbing, Heating, and Air-Conditioning Contractors. Sector 23: 

238220. Construction: Industry Series, Preliminary Detailed Statistics for 

Establishments, 2007, 2007. <http://www.census.gov/econ/>

9. U.S. Census Bureau, Construction: Industry Series: Preliminary Detailed Statistics for 

Establishments: 2007. New Single-Family General Contractors, New Multifamily 

Housing Construction (Except Operative Builders), New Housing Operative Builders, 

and Residential Remodelers, 2007. <http://www.census.gov/econ/>

10. U.S. Census Bureau, Construction: Industry Series: Preliminary Detailed Statistics for 

Establishments: 2007. Sector 23, EC0723I1:236200 (Commercial Building 

Construction), 2007. <http://www.census.gov/econ/>

11. U.S. Department of Energy: Energy Information Administration, 2003 Commercial 

Building Energy Consumption Survey, Consumption and Expenditures (CBECS), Public 

Use Data, <ftp://ftp.eia.doe.gov/emeu/cbecs/microdata.html>
6-28

12. U.S. Department of Energy: Energy Information Administration, Residential Energy 

Consumption Survey: 2009 RECS Survey Data, 2013. (Last accessed March, 2014.) 

<http://www.eia.gov/consumption/residential/data/2009/>

13. Sales Tax Clearinghouse Inc., State Sales Tax Rates Along with Combined Average City 

and County Rates, 2014. (Last accessed January 10, 2014.) 

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