6

- i CHAPTER 6. MARKUPS A NALYSIS

TABLE OF CONTENTS

6.1 INTRODUCTION

................................ ................................ ................................ ........... 6

- 1

6.2 DISTRIBUTION CHANNEL S

................................ ................................ ....................... 6

- 1

6. 3 APPROACH FOR MANUFAC TURER MARKUP

................................ ....................... 6

- 3

6.4 APPROACH FOR WHOLESA LER AND CONTRACTOR M ARKUPS

..................... 6

- 3

6.4.1 Wholesaler Markup

................................ ................................ ................................ .......... 6

- 5

6.4.2 Mechanical and General Contractor Markups

................................ ................................ . 6

- 6

6.5 DERIVATION OF MARKUP S

................................ ................................ ...................... 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 Ge neral 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 Residentia l 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

- 196

- 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 Su mmary 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

- 36

- 1 CHAPTER 6. M ARKUP S A NALYSIS

6.1 INTRODUCTION

To carry out its analyses of markups for commercial packaged boilers , the U.S. Department of Energy (DOE) determine s the cost to the commercial consumer of baseline equipment and the cost of more efficient units the commercial consume r would purchase under new energy conservation standards. DOE calculate s such costs based on engineering estimates of manufacturing costs plus appropriate markups for the various distribution channels for commercial packaged boiler s

.

For wholesalers and c ontractors, DOE estimate s a baseline markup and an incremental markup. DOE defines a baseline markup as a multiplier that converts the manufactur er 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 manufactur er selling price of higher efficiency equipment to the commercial consumer purchase price for the same equi pment. 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 s ection

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. F or sales of equipment to contribute positively to

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

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

associated with th at particular equipment and the degree of market competition.

6.2 DISTRIB UTION CHANNELS

The appropriate markups for determining commercial consumer equipment prices depend on the type of distribution channels through which the equipment move s from manufacturers to purchasers. In the case of commercial packaged boiler s , the maj ority of them are purchased for

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

install ed in residential building s . DOE estimate s that 94.5 percent of total commercial packaged

boiler shipment s are to commercial applications and 5.5 percent to residential application s

. Hence, DOE calculate s the markups separately for both commercial and residential application s of commercial packaged boiler s

.

Within each application, there are two primary types of markets descri bing the way most equipment pass es from the manufacturer to the commercial consumer : (1) commercial packaged6

- 2 boiler s installed in replacement markets or by new owners

, and (2) commercial packaged boiler s that are installed in new construction

. Depending on the rating and capacity of a commercial packaged boiler

, the distribution channel s for replacement and new construction market s can

vary slightly between small boiler s and large boilers.

In th e 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 t he chain

— the general contractor. In th e 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

consum er

.

The replacement and new construction distribution channel s for a large boiler with a capacity above 2.5 million Btu/hr is very similar to that for a small boiler, but replac es the wholesaler with a manufacturer’s representative. M anufacturers 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 simi lar 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 ch annel. Because DOE does not have enough information at this point to estimate separate markups for manufacturer’s representatives, DOE assume s that the manufacturer’s representative markup is the same as the wholesaler markup.

In addition to the se conve ntional 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 market s . This national account distribution channel is applicable when the commercial consumer orders a customized boiler directly from a manufacturer

, account ing 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 boiler s

.

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

C hapter 7, “Markups for Equipment Price Determination,” in the 2004 Commercial Air Conditioners Advanced Notice of Proposed Rulemaking techni cal 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

Boiler s

6.3 APPROACH FOR MANUFAC TURER MARKUP

DOE uses manufacturer markups to transform a manufacturer’s product ion cost into the manufacturer selling price

. Detailed methodology to derive manufacturer markups are described

in section 5.9 of the e ngineering a nalysis chapter.

6.4 APPROACH FOR W HOLESALER AND C ONTRACTOR M ARKUPS

DOE examine s how wholesaler and contractor markups may change in response to changes in commercial packaged boiler efficiency levels and other factors. Using available data,

DOE estimate s that there are differences between incremental markups on incremental

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

of equipment with baseline efficiency

.

DOE derive s wholesaler and contractor markups from three key assumptions about the

costs associated with commercial packaged boiler s

. In general, DOE base s 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 Representati ve Mechanical

Contractor Commercial

Consumer

Mechanical

Contractor General

Contractor Commercial

Consumer Manufacturer National Account Manufacturer Commercial

Consumer

National Account Manufacturer Commercial

Consumer Wholesaler/

Manufacturer’s Representative6

- 4 obtain s income st atements 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 use s the

financial data from t he 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 comm ercial packaged boiler s

.

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

MSP of commercial packaged boiler s (variant costs )

, and ( 2) costs that do not vary with

the MSP of commercial packaged boiler s (invariant costs).

3. Overall

, wholesale and contractor prices for commercial packaged boiler s vary in proportion to the wholesale r and contractor costs for commercial packaged boiler s 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 boiler s

.

Information obtained from the trade literature, selected heating, ventilating, and air

conditioning ( HVAC ) wholesalers, contractors, and consultants tends to support the second assumption about cost categories

. T h e gathered information indicates that wholesale and contractor markups vary according to the quantity of labor and materials used to distribute and

i nstall 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, 36,0 00 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 wholesaler s 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 conclude s that markups for more

- efficient equipment are un likely 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, i t is unlikely that the cost of secretarial support in an administrative office will increase by 30

- percent also. Therefore, DOE assume s that i ncremental 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 develop s baseline and incremental markups for wholesalers using the firm income statement from the HARDI 2013 Profit Report ( a ppendix 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 calculate s the baseline markup for wholesalers using the following equation:

WHOLE WHOLE WHOLE WHOLE

WHOLE WHOLE WHOLE

BASE 

### CGS VC IVC CGS

CGS GM CGS MU ) ( + +

= +

=

Eq. 6

. 1

Where:

MU BASE = b aseline wholesaler markup,

CGS WHOLE = w holesaler cost of goods sold,

GM WHOLE = w holesaler gross margin,

IVC WHOLE = w holesaler invariant costs, and

VC WHOLE = w holesaler variant costs.

Incremental markups are coefficients that relate the change in the MSP of more energy

efficient models , or th e equipment that meet s 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 calculate s the incremental markup ( MU INCR ) for wholesalers using the following equation:

WHOLE WHOLE WHOLE

INCR 

### CGS VC CGS MU +

=

Eq. 6

. 2

Where:

MU INCR = i ncremental wholesaler markup,6

- 6 CGS WHOLE = w holesaler cost of goods sold, and

VC WHOL E = w holesaler variant costs.

6.4.2 Mechanical and General Contractor Markup s

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

boiler s , DOE collect s 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 boiler s in commercial applications, DOE

collect s data from the 2007 Econ omic Census Commercial Building Construction series (NAICS 236220). To estimate general contractor markups for commercial packaged boiler s in residential application s , DOE collect s data from the 2007 Economic Census Residential Building

Construction series , which is the aggregation of New Single

- Family General Contractors (NAICS 236115), New M ultifamily H ousing C onstruction (NAICS 236116), New H ousing

O

perative B uilders (NAICS 236117), and Residential R emodelers (NAICS 236118).

ACCA financial data provid e 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:



### (%) (%) (%)

GM Sales Sales MU BASE



### − =

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 calculate s the basel ine markup for mechanical contractors and general contractors using the following equation:



### SubCost MatCost Pay V MU CONSTRUCT

BASE 

### + + =

Eq. 6

. 4

Where:

BASE MU = baseline mechanical contractor or general contractor markup,

CONSTRUCT V = value of construction,

Pay = payroll for construction workers,

MatCost = cost of materials, and

SubCost = cost of subcontracted work.6

- 7 Similarly , DOE estimate s the incremental mechanical contractor and general contractor markups by marking up those costs that scale with a change in the MSP (variant costs

, V C

) for

more energy

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

between those that do not sca le with the manufacturer price (labor and occupancy expenses), and those that do (other operating expenses and profit). Hence, DOE categorize s the Census cost data in each major cost category and estimated markups using the following equation:

CONT CONT CONT

INCR 

### CGS VC CGS MU +

=

Eq. 6

. 5

Where:

MU INCR = incremental contractor markup,

CGS CONT = contractor cost of goods sold, and

VC CONT = c ontractor variant costs.

6.5 D ERIVATION OF M ARKUPS

6.5.1 Manufacturer Markup

The methodology DOE use s to determine the manufacturer markup s for commercial packaged boiler s is similar to the methodology described in chapter 5 of the Residential Furnace

and Central Air

- Conditioning E quipment D irect F inal R ule T echnical S upport D ocument ( TSD). c DOE use s U.S. Security and Exchange Commission (SEC) 10

- K report s covering the period from 2008 to 2012 from publicly owned commercial packaged boiler manufacturing companies to estimate manufacturer markups. Table 6.5.1 presen ts 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

- 00126

- 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 Boi ler ≥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 itemize s revenues and costs into cost categories, including direct equipment expenses (cost of goods sold ), labor expense s, occupancy expenses, other operating expenses, and profit. DOE presents these data in full in a ppendix 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 boiler s in both commercial and residential application s

.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. 73 9 1. 000 Labor Expenses: Salaries and benefits 0.151 0.20 4 Occupancy Expense: Rent, maintenance, and utilities 0. 03 5 0.04 7 Other Operating Expenses: Depreciation, advertising, and

insurance. 0. 05 2 0.07 0

Operating Profit 0. 02 3 0.0 31 Wholesaler Baseline Markup ( MU WHOLE BASE ) 1.35 3 Incremental Markup ( MU WHOLE INCR ) 1.10 1
Source: Heating, Air Conditioning & Refrigeration Distributors International. 201 3

. 201 3 Profit Report ( 201 2 Data).

In this case, direct equipment expenses (cost of goods sold) represent about $0.7 4 per dolla r sales revenue, so for every $1 wholesalers take in as sales revenue, $0.7 4 is used to pay the direct equipment costs. Labor expenses represent $0.1 5 per dollar sales revenue, occupancy expenses represent $0.04, other operating expenses represent $0. 0 5 , a nd profit accounts for $0.0 2 per dollar sales revenue.

DOE convert s the expenses per dollar sales into expenses per dollar cost of goods sold, by dividing each figure in the first data column by $0.7 4 ( 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. 0 47 to cover occupancy expenses, $0. 07 0 for other operating expenses, and $0. 0 31 in profits. This totals to
$1. 3 53 in sales revenue earned for every $1.00 spent on equipment costs. Therefore, the wholesaler baseline markup ( MU WHOLE BASE ) is 1. 3 53 ($1. 3 53 ÷ $1.00).

DOE also use s the data in the second col umn 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 examp le, 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. 3 53 , implying that the incremental markup is 1. 3 53 , 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. 0 75 , which when divided by 73. 9 cents in cost of goods sold yields an increase of $0. 101 , giving a wholesaler incremental markup ( MU WHOLE INCR ) of 1. 101

. See a ppendix 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 sale s and cost data

, including value of construction, cost of subcontract work, cost of materials, and payr oll 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 t he plumbing and HVAC contractor industry at the national aggregated level are presented in Table 6.5.3

. ( A ppendix 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 marg in totals $0.32 per dollar sales revenue. DOE convert s 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 ( MU MECH CON T 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 classi fying 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 believe s the la bor 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 gene ral contractor incremental markup ( MU MECH CONT INCR ) of 1. 18

.

6.5.3.2 Markups for Mechanical Contractors in the Replacement and New

Construction Markets

DOE derive s the baseline and incremental markups for both replacement and new construction markets using the 20 07 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. Howeve r, 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 th e 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 ar e 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 0.7 286 1.00 Gross Margin: Labor, occupancy, operating expenses, and profit 0.27 14 0.37 2

Revenue: Baseline revenue earned per dollar cost of goods 1.37 2 Baseline Markup ( MU MECH CONT BASE ) 1.37 2

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 0.703 1 1.000 0.745 1.000

Gross Margin: Labor, occupancy, operating expenses, and profit 0.29 69 0.422 0.255 0.342

Baseline Markup ( MUMECH

CONT BASE ): Revenue per dollar cost of goods NA 1.42 2 NA 1.34 2

% Difference from Aggregate

Mechanical Contractor Baseline

MU NA 3.6 3 % NA

- 2.2 0 %

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

calculate s that the baseline markups for the replacement and new construction markets are 3.6 3

- percent higher and 2. 2 0

- percent lower, respectively, than for all mechanical contractors serving

all markets

.

The markup deviations ( i.e., 3.6 3

- percent higher and 2. 2 0

- 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 assume s 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 1.1 6

6.5.4 General Contractor Markups

DOE derive s 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 boiler s

. 9 The commercial

construction sector includes establishments primarily responsible for the construction of6

- 13 commercial and ins titutional 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

assume s that the total dollar values that the U.S. Census Bureau report s , 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 c olumn

. ( Table 6

- A.3. 1 in a ppendix 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 $0.7 6 per dollar sales revenue to the general contractor. Labor expenses represent $0.0 8 per dollar sales revenue, occupancy expenses represent $0.01 per dollar sales revenue, other operating expenses represent $0.03, and profit makes up $0.1 2 per dollar sales revenue.

DOE convert s 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 s ales 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 ( MU GCONTRACT_ 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 w ill 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 t his 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 ( MU GCONTRACT_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 a ppendix 6

- A.3 contains th e 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 do llar 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 convert s 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 ( MU GEN C ONT 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 $1.4 7 , 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 w ill lead to a $1.00 increase in the general contractor price, for an incremental markup of 1.0. DOE believe s 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 ca se, for a $1.00 increase in the equipment price, the general contractor price will increase by $1.3 4

, giving a general contractor incremental markup ( MU GEN CONT INCR ) of 1.3 4

.

6.6 D ERIVATION OF CENSUS REGIONS M ARKUPS

In this analysis, DOE consider s 16 different commercial packaged boiler equipment

classes. DOE assume s 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 application s

.

Wholesalers and mechanical and general contractors in the commercial packaged boiler

indust r y are divided into the nine regions provided by the latest CBE C S 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

estimate s baseline and incremental markups for the seven HARDI regions (Northeastern, Mid

Atlantic, 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 assign s all

states to one of the nine CBECS regions in the analysis and then calculate s population

- weighted

baseline s and incremental markup averages for each region. The r esults are summarized in Table

6.6.1

d RECS 2009 provides 27 regions (also called reportable domains). The 27 th 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 coolin g and heating degree days. See appendix 7

- A for more details.6

- 16 Table 6.6.1 Regional Wholesaler Markups fo r Commercial Packaged Boiler s in Commercial Application

CBECS Regions Census Divisions Baseline

MU Incremental

MU

1 New England 1.366 1.0 72

2 Middle Atlantic 1.360 1.0 84

3 East North Central 1.3 58 1. 104

4 West North Central 1.36 4 1. 115

5 South Atlantic 1.3 37 1. 096

6 East South Central 1.3 35 1. 097

7 West South Central 1.348 1.11 2

8 Mountain 1.3 91 1.1 11

9 Pacific 1.4 04 1.11 0

In residential application s , DOE assign s all states to one of the 30 RECS regions in the analysis and then calculate s population

- weighted baseline s and incremental markup averages for each region in the residential application s . The r esults are summarized in Table 6.6.2

.6

- 17 Table 6.6.2 Regional Wholesaler Markups for Commercial Packaged Boiler s 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 equation s mentioned in Section 6.4.2

. DOE is able to estimate baseline markups for each state. Because the Census does not provide more6

- 18 disaggregated cost data, DOE is not able to differentiate between invariant and vari ant cost

.

Alternatively, DOE calculate s the national baseline and incremental markups ( Table

6.6.3 ) and finds that the incremental markup s are around 20

- percent l ower than the baseline markups. DOE further derive s the state

- level incremental markups by applying this ratio to the baseline markup s in each state, assuming that this deviation applies equally to all states. ( Table

6

- A.4.1 in a ppendix 6

- A.4 contains the full set of data .)

T o estimate the baseline and incremental markups for both replacement and new construction markets for each state, DOE applie s 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 s ection 6.5.3.2

, to the statewide baseline and incremental markups. DOE assume s that this deviation of replacement and ne w construction markets applies equally to the baseline and incremental markups.

In commercial application s , DOE divide s all states among the nine CBECS regions and

then calculate s population

- weighted average baseline and incremental markups for mechanic al

contractors for each region , as shown in Table 6.6.3

.

Table 6.6.3 Population

- Weighted Mechanical Contractor Markups for Commercial Packaged Boiler s in Commercial Applicati on s

Last, DOE divide s all states among the 30 RECS regions and then calculate s population

weighted average baseline and incremental markups for mechanical contractors for each region in residential application s , as shown in Table 6.6. 4

. CB ECS Region s 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 1.2066

- 19 Table 6.6.4 Population

- Weighted Mechanical Contractor Markups for Commercial Packaged Boiler s in Residential Application s

6.6.3 Estimation of General Contractor Markups

t o derive regional general contractor markups for the commercial building construction sector from the 2007 Economic Census, DOE use s the Commercial Building Construction series RECS Region s 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 1.1456

- 20 (NAICS 236220) from the 2007 Economic Census. Similarly, DOE combine s four Geogr aphic Area Series: (1) New Single

- Family General Contractors (NAICS 236115), (2) New M ultifamily

H

ousing C onstruction (NAICS 236116), (3) New H ousing O perative B uilders (NAICS 236117), and (4) Residential R emodelers (NAICS 236118) to derive regional general contractor markups for the residential application of commercial packaged boiler s

Each series consist s 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

emp loyed to estimate regional baseline and incremental markups. First, DOE estimate s 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 l ower than the national baseline markup in commercial and residential application, respectively ) to the baseline markups for each state

. Last, DOE divide s all states among the nine CBECS regions and 30

RECS regions ; then calculate s population

- weighted average baseline and incremental markups for general contractors for each region in both commercial and residential application s

. The final

results are summarized below in Table 6.6.5 for commercial application s and in Table 6.6.6 for

residential application s ( Table 6

- A.4.2 and Table 6

- A.4.3 in a ppendix 6

- A.4 conta ins the full set of data.)

Table 6.6.5 General Contractor Markups for Commercial Packaged Boiler s in Commercial Application s

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 1.1996

- 21 Table 6.6.6 General Contractor Markups for Commercial Packaged Boiler s in Residential Application s

RECS Region s 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 applie s 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 packaged6

- 22 boiler s 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 consumer s. Therefore, no addit ional sales tax is necessary to

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

DOE derive s 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 derive s population

- weighted average tax values for each CBECS and RECS region to match the regional markups for who lesalers 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 a ppendix 6

- A. 5

.

Table 6.7.1 Average Sales Tax Rates by CBECS Region

CBECS Regions Census Divisions Population Projection (2019) Tax Rate (201 4 ) %

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 7.116

- 23 Table 6.7.2 Average Sales Tax Rates by RECS Region

RECS Regions State(s) Population Projection (2019) Tax Rate (201 4 ) %

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 use s 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 energy6

- 24 conservation standards). The following equation shows how DOE use s the overall baseline markup to determine the equipment price for baseline models.



### ( )

BASE OVERALL MFG SALES BASE MFG MFG BASE MU COST Tax MU MU COST CPP

_ × = × × × = Eq. 6.8

. 1

Where:

CPP BASE = commercial consumer equipment price for baseline models,

COST MFG = m anufacturer cost for baseline models,

MU MFG = m anufacturer markup,

MU BASE = b aseline replacement or new home channel markup,

Tax SALES = s ales tax (replacement applications only), and

MU OVERALL_BASE = b aseline overall markup.

Similarly, DOE use s the overall incremental ma rkup 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 equi pment price s 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 use s the overall incremental markup to determine the commercial consumer equipment price for more energy

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



## ( )

INCR OVERALL MFG BASE SALES INCR MFG MFG BASE OVERALL MFG STD

MU COST CPP Tax MU MU COST MU COST CPP

_ _

× D + = × × × D + × =

Eq. 6.8

. 2

Where:

CPP STD = commercial consumer equipment price for models meeting new energy conservation standards,

CPP BASE = commercial consumer equipment price for baseline models,

COST MFG = m anufacturer cost for baseline models,

Δ COST MFG = c hange in manufacturer cost for more energy

- efficient models,

MU MFG = m anufacturer markup,

MU INCR = i ncremental replacement or new home channel markup,

Tax SALES = s ale s tax (replacement applications only),

MU OVERALL_BASE = b aseline overall markup ( equipment of manufacturer markup, baseline replacement or new home channel markup, and sales tax), and

MU OVERALL_INCR = i ncremental 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 boiler s

. The values represent the

w eighted

- 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 s hipment forecasts for the year 20 19 (see chapter 9 for name abbreviations by equipment

class ), DOE estimate s 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

Boiler s 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 2.06/1.666

- 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 1.966

- 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. < h ttp://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: Industr y 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 Co ntractors), 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 Ope rative 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, EC072 3I1:236200 (Commercial Building Construction), 2007. < http://www.census.gov/econ/ >

11. U.S. Department of Energy: Energy Information Administration, 2003 Commercial Building Energy Consumption Survey, Consumpti on 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 In c., State Sales Tax Rates Along with Combined Average City and County Rates, 2014. (Last accessed January 10, 2014.)

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