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 ....................................................... 6-4

6.4 APPROACH FOR WHOLESALER AND CONTRACTOR MARKUPS ..................... 6-4

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

6.4.2 Mechanical and General Contractor Markups................................................................. 6-7

6.5 DERIVATION OF MARKUPS ...................................................................................... 6-8

6.5.1 Manufacturer Markup ...................................................................................................... 6-8

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 Residential Boiler Product 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 Residential Building General Contractor Expenses and Markups..................... 6-13

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

Table 6.6.1 Wholesaler Markups for Residential Boilers in Residential Application.......... 6-16

Table 6.6.2 Regional Wholesaler Markups for Residential Boilers in Commercial 

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

Table 6.6.3 Shipment-Weighted Mechanical Contractor Markups for Residential 

Boilers in Residential Application..................................................................... 6-18

Table 6.6.4 Shipment-Weighted Mechanical Contractor Markups for Residential 

Boilers in Commercial Application ................................................................... 6-19
6-ii

Table 6.6.5 General Contractor Markups for Residential Boilers in Residential 

Application......................................................................................................... 6-20

Table 6.6.6 General Contractor Markups for Residential Boilers in Commercial 

Application......................................................................................................... 6-21

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

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

Table 6.8.1 Summary of Overall Markups on Residential Boilers in Residential 

Application......................................................................................................... 6-24

Table 6.8.2 Summary of Overall Markups on Residential Boilers in Commercial 

Application......................................................................................................... 6-25

Table 6.8.3 Summary of Total Markup by Residential Boiler Product Class ...................... 6-25

LIST OF FIGURES

Figure 6.2.1 Distribution Channels for Residential Boilers in Residential Application .......... 6-2

Figure 6.2.2 Distribution Channels for Residential Boilers in Commercial Application ........ 6-3
6-1

CHAPTER 6. MARKUP ANALYSIS

6.1 INTRODUCTION

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

cost to the consumer of baseline products and the cost of more efficient units the consumer 

would purchase under new energy conservation standards. DOE calculated such costs based on 

engineering estimates of manufacturing costs plus appropriate markups for the various 

distribution channels for residential boilers. 

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

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

price of equipment with baseline efficiency to the 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 

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 in Section 6.2. 

Generally, companies mark up the price of a product 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 

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

depreciation; and taxes—and company profits. In order for sales of a product to contribute 

positively to company cash flow, the product’s markup must be greater than the corporate gross 

margin. Products command lower or higher markups, depending on company expenses 

associated with the product and the degree of market competition. 

6.2 DISTRIBUTION CHANNELS

The appropriate markups for determining consumer equipment prices depend on the type 

of distribution channels through which products move from manufacturers to purchasers. In the 

case of residential boilers, the majority of them are purchased for residential use, but a small 

fraction of residential boilers are purchased to be installed in small to mid-size commercial 

buildings. DOE estimated that 93% of total residential boiler shipments are to residential 

applications and 7% to commercial applications. Hence, DOE calculated the markups separately 

for both residential and commercial application of residential boilers.

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

products pass from the manufacturer to the consumer, one applying to residential boilers

installed in replacement markets or by new owners and the other applying to residential boilers 

that are installed in new construction. In the replacement distribution channel, the manufacturer 

generally sells the equipment to a wholesaler, who in turn sells it to a mechanical contractor, who 
6-2

in turn sells it to the consumer. The new construction distribution channel 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 consumer.

Figure 6.2.1 illustrates the two main distribution channels for residential boilers in the 

residential application. 

 Replacement and New Owner:

 New Construction:

Figure 6.2.1 Distribution Channels for Residential Boilers in 

Residential Application

For residential boilers in the commercial application, DOE considers an additional 

distribution channel for which the manufacturer sells the equipment to the wholesaler and then to 

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

This national account distribution channel is applicable to small to mid-size commercial 

buildings where the on-site staff or internal personnel generally purchase equipment from 

wholesalers at much lower prices due to the large volume purchased and perform the installation 

themselves. Occasionally, the equipment manufacturers and wholesalers can be the same entity, 

so the consumer selling price could potentially be even lower than the usual national account 

channel. However, DOE does not have sufficient information to determine the appropriate 

markup for this particular distribution channel. 

Figure 6.2.2 shows the main distribution channels for residential boilers in the 

commercial application. 

Manufacturer Wholesaler Mechanical

Contractor

Consumer

Wholesaler Mechanical 

Contractor

General 

Contractor

Manufacturer Consumer
6-3

Replacement:

 

New Construction:

 

Figure 6.2.2 Distribution Channels for Residential Boilers in 

Commercial Application

Based on information provided from manufacturer interviews, there is another possible 

distribution channel which includes retail store instead of wholesaler. In this case, the 

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

who in turn sells it to the consumer. However, DOE does not have enough information at this 

point to make a separate markup estimation for this distribution channel. DOE would assume 

that the retailer markup is similar to the wholesaler markup. DOE is also aware that there may be 

two additional distribution channels for residential boilers: (1) online distribution where 

manufacturers sell the products to online retailers who in turn sell them directly to consumers, 

and (2) rebranding distribution channel where wholesalers or retailers negotiate good pricing 

from the boiler manufacturer based on high volumes and have the product customized to carry 

their name, and then send it through their normal distribution channel to the contractors. The 

former one mainly applies to the do-it-yourself (DIY) installation representing around two 

percent of the total HVAC shipments, which implies an even smaller fraction of the total 

residential boiler shipments. For the latter one, DOE assumes that it would have the same overall 

markups as the conventional distribution channels. Although manufacturers may have lower 

margin, wholesalers and retailers would redistribute the profit throughout the distribution 

channel to have the final retail price comparable with products sold through conventional 

Manufacturer Wholesaler Mechanical

Contractor

Consumer

Wholesaler Mechanical 

Contractor

General 

Contractor

Manufacturer Consumer

Manufacturer Wholesaler Consumer

Manufacturer Wholesaler Consumer

National Account

National Account
6-4

distribution channels. Due to the reasons mentioned above, DOE did not consider them in this 

analysis. 

6.3 APPROACH FOR MANUFACTURER MARKUP 

DOE uses manufacturer markups to transform a manufacturer’s product cost into a 

manufacturer sales price. Using the CGS and gross margin (GM), the manufacturer markup can 

be calculated as follows:

MFG

MFG MFG

MFG CGS

CGS GM MU + =

Eq. 6.3.1

Where:

MUMFG = manufacturer markup,

CGSMFG = manufacturer cost of goods sold, and

GMMFG = manufacturer gross margin.

The manufacturer’s CGS (or manufacturer production cost (MPC)) plus its GM equals the 

manufacturer selling price (MSP).

6.4 APPROACH FOR WHOLESALER AND CONTRACTOR MARKUPS

DOE examined the manner in which wholesaler and contractor markups may change in 

response to changes in residential boiler efficiency levels and other factors. Using the available 

data, DOE estimated that there are differences between incremental markups on incremental

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

of products with baseline efficiency.

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

the costs associated with residential boilers. DOE based the wholesaler and mechanical 

contractor markups on firm-level income statement data, and based the general contractor 

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

obtained the firm income statements from the Heating, Air-conditioning & Refrigeration 

Distributors International (HARDI) 2012 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 used 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 
6-5

install heating and air-conditioning equipment.a 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 residential boilers.

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

MSP of residential boilers (variant costs); and 2) costs that do not vary with the MSP of 

residential boilers (invariant costs).

3. Overall, wholesale and contractor prices for residential boilers vary in proportion to the 

wholesaler and contractor costs for residential boilers included in the income statements.

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

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

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

tend to handle multiple commodity lines, including room air conditioners, furnaces, central air 

conditioners and heat pumps, and boilers, the data provide the most accurate available indication 

of the expenses associated with residential boilers.

Information obtained from the trade literature, selected HVAC wholesalers, contractors, 

and consultants tends to support the second assumption. This information indicates that 

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

distribute and install appliances. In the following discussion, DOE assumes a division of costs 

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

those that do (operating expenses and profit).

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

competitive, and 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 HVAC manufacturers,3 5,300 wholesalers of heat pumps 

and air-conditioning equipment,4 more than 170,000 general residential contractors, 36,000 

commercial and institutional building contractors,5 and 91,000 HVAC contractors6 listed in the 

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

either set prices in line with costs or quickly go out of business.7

DOE concluded 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 residential boiler unit increases by 30 

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

 a Wholesalers and mechanical contractors to which these reports refer handle multiple commodity lines.
6-6

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

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

6.4.1 Wholesaler Markup 

Using the above assumptions, DOE developed baseline and incremental markups for 

wholesalers using the firm income statement from the HARDI 2012 Profit Report (appendix 6-

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

costs). Here, variant costs were defined as costs that likely vary in proportion to the change in 

MSP induced by increased efficiency standards; in contrast, invariant costs were defined as costs 

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

standards. DOE calculated 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. 6.4.1.1

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 those products that meet 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 calculated the incremental 

markup (MUINCR) for wholesalers using the following equation:

WHOLE

WHOLE WHOLE

INCR CGS

CGS VC MU + =

 Eq. 6.4.1.2

Where:

MUINCR = incremental wholesaler markup,

CGSWHOLE = wholesaler cost of goods sold, and

VCWHOLE= wholesaler variant costs.
6-7

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 residential boilers, 

DOE collected 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 residential boilers in residential applications, DOE collected data from 

the Residential Building Construction series from the 2007 Economic Census, 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). To estimate general contractor markups for residential 

boilers in commercial applications, DOE collected data from the Commercial Building 

Construction series (NAICS 236220) from the 2007 Economic Census. ACCA financial data 

provide GM as percent of sales for the mechanical contractor industry; therefore, the baseline 

markup can be derived with the following equation:

(%) (%)

(%)

Sales GM

Sales MUBASE − =

Eq. 6.4.2.1

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 calculated the baseline markup for mechanical contractors and general 

contractors using the following equation:

Pay MatCost SubCost

V MU CONSTRUCT

BASE + + =

Eq. 6.4.2.2

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.

Analogously, DOE estimated the incremental mechanical contractor and general 

contractor markups by only marking up those costs that scale with a change in the MSP (variant 

costs, VC) for more energy-efficient products. As stated above, 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 categorized the Census cost data 

in each major cost category and estimated markups using the following equation: 
6-8

CONT

CONT CONT

INCR CGS

CGS VC MU + =

 Eq. 6.4.2.3

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 used to determine manufacturer markup for residential boilers is 

similar to the methodology described in chapter 5 of the Residential Furnace and Central AirConditioning products Direct Final Rule technical support document (TSD).b DOE used U.S. 

Security and Exchange Commission (SEC) 10-K reports covering the period from 2008 to 2012 

from publicly owned residential boiler manufacturing companies to estimate manufacturer 

markups. Table 6.5.1 presents manufacturer markups for the six different product classes 

considered in this analysis.

Table 6.5.1 Manufacturer Markups by Residential Boiler Product Class

Product Class Baseline Markup

Gas-Fired Hot Water Boiler 1.41

Gas-Fired Steam Boiler 1.41

Oil-Fired Hot Water Boiler 1.41

Oil-Fired Steam Boiler 1.41

Electric Hot Water Boiler 1.41

Electric Steam Boiler 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 itemized revenues and costs into cost categories, including 

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

operating expenses, and profit. DOE presents these data in full in appendix 6-A.1. Table 6.5.2

summarizes them as cost-per-dollar sales revenue in the first data column. These wholesaler 

markups are applicable to residential boilers in both residential and commercial applications. 

 b The TSD for the direct final rule for HVAC products is available at the following website: 

http://www1.eere.energy.gov/buildings/appliance_standards/residential/pdfs/hvac_ch_05_engineering_2011-04-

22.pdf
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 0.737 1.

000

Labor Expenses: Salaries and benefits 0.151 0.205

Occupancy Expense: Rent, maintenance, and utilities 0.036 0.049

Other Operating Expenses: Depreciation, advertising, and 

insurance.

0.055 0.075

Operating Profit 0.021 0.028

Wholesaler Baseline Markup (MUWHOLE BASE) 1.357

Incremental Markup (MUWHOLE INCR) 1.103

Source: Heating, Air Conditioning & Refrigeration Distributors International. 2012. 2012 Profit Report (2011 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 $0.06, and profit accounts for $0.02

per dollar sales revenue.

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

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

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

equipment costs, the wholesaler allocates $0.205 to cover labor costs, $0.049 to cover occupancy 

expenses, $0.075 for other operating expenses, and $0.028 in profits. This totals to $1.357 in 

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

baseline markup (MUWHOLE BASE) is 1.357 ($1.357 ÷ $1.00). 

DOE also used the data in column two 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 $1.360, implying 

that the incremental markup is 1.360, 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 $0.076, which when 

divided by 73.7 cents in cost of goods sold yields an increase of $0.103, giving a wholesaler 

incremental markup (MUWHOLE INCR) of 1.103. 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 was able to determine the invariant (labor 

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

particular sector. By using the equation mentioned above, baseline and incremental markups 

were estimated. The markup results 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 converted these expenses per dollar 

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

by $0.68. 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. 

DOE was also able to use the data in column two in Table 6.5.3 to estimate the 

incremental markups, after classifying the costs as either invariant or variant. At one extreme, if 
6-11

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 derived the baseline and incremental markups for both replacement and new 

construction markets using the 2007 Economic Census industrial cost data8 supplemented with 

the most recent ACCA 2005 financial data.1 The 2007 Economic Census provides sufficient 

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

DOE was 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 0.73 1.00

Gross Margin: Labor, occupancy, operating 

expenses, and profit

0.27 0.37

Revenue: Baseline revenue earned per dollar cost of goods 1.37

Baseline Markup (MUMECH CONT BASE) 1.37

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 1.000 0.745 1.000

Gross Margin: Labor, occupancy, 

operating expenses, and profit 0.297 0.422 0.255 0.342

Baseline Markup (MUMECH 

CONT BASE): Revenue per 

dollar cost of goods

NA 1.42 NA 1.34

% Difference from Aggregate 

Mechanical Contractor Baseline 

MU

NA 3.6% NA -2.2%

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 

calculated that the baseline markups for the replacement and new construction markets are 3.6

percent higher and 2.2 percent lower, respectively, than for all mechanical contractors serving all 

markets.

The markup deviations (i.e., 3.6 percent higher and 2.2 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 assumed 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 1.45 1.15

6.5.4 General Contractor Markups 

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

residential building construction and commercial building construction sector to reflect the 

residential and commercial application of residential boilers.

9 The residential construction sector 

includes establishments primarily engaged in construction work, including new construction 
6-13

work, additions, alterations, and repairs of residential buildings, whereas the commercial 

construction sector includes establishments primarily responsible for the construction of 

commercial and institutional 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 itemized 

revenues and expenses for the construction industry as a whole in total dollars rather than in 

typical values for an average or representative business. Because of this, DOE assumed that the 

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

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 residential 

building construction 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 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 converted these expenses per dollar sales into revenue per dollar cost of goods sold, 

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

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

$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.
6-14

DOE was also able to use the data in column two in 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 $1.47, 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.

Table 6.5.8 summarizes the expenses for general contractors in commercial building 

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

by dividing each figure in the first data column by $0.76. 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 to 

$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.
6-15

DOE was also able to use the data in column two of 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 $1.48, 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.

6.6 DERIVATION OF CENSUS REGIONS MARKUPS

In this analysis, DOE considered six different residential boiler product classes. DOE 

assumed a market saturation rate for each product class that varies by geographical region

defined by Residential Energy Consumption Survey (RECS)11 and Commercial Building Energy 

Consumption Survey (CBECS),

12 based on the shipments forecasts for the year 2020. Therefore, 

regional markups were calculated for each residential boiler product class in both residential and 

commercial application.

Wholesalers and mechanical and general contractors in the residential boiler industry

were divided into the 30 regionsc provided by the latest RECS for the residential application 

and also were divided into the nine regions provided by the latest CBECS for the commercial 

application. Regional baseline and incremental markups were derived using the region/state 

level data from the 2012 HARDI Profit Report and the 2007 Economic Census. 

6.6.1 Estimation of Wholesaler Markups

Based on the regional income statement from the 2012 HARDI Profit Report, DOE 

estimated 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 was assigned the HARDI 

regional baseline and incremental markups for the region to which it belongs. Then, DOE 

assigned all states to one of the 30 RECS regions used in the analysis and then calculated 

shipment-weighted baseline and incremental markup averages for each region in residential 

application. The results are summarized in Table 6.6.1.

 c 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 Wholesaler Markups for Residential Boilers in Residential Application 

RECS 

Regions State(s) Baseline MU

Incremental 

MU

1 Connecticut, Maine, New Hampshire, Rhode Island, Vermont 1.366 1.081

2 Massachusetts 1.366 1.081

3 New York 1.366 1.081

4 New Jersey 1.351 1.105

5 Pennsylvania 1.354 1.102

6 Illinois 1.362 1.099

7 Indiana, Ohio 1.357 1.099

8 Michigan 1.357 1.099

9 Wisconsin 1.362 1.099

10 Iowa, Minnesota, North Dakota, South Dakota 1.362 1.099

11 Kansas, Nebraska 1.362 1.099

12 Missouri 1.362 1.099

13 Virginia 1.351 1.105

14 Delaware, District of Columbia, Maryland 1.351 1.105

15 Georgia 1.340 1.106

16 North Carolina, South Carolina 1.340 1.106

17 Florida 1.340 1.106

18 Alabama, Kentucky, Mississippi 1.345 1.104

19 Tennessee 1.340 1.106

20 Arkansas, Louisiana, Oklahoma 1.348 1.119

21 Texas 1.348 1.119

22 Colorado 1.362 1.099

23 Idaho, Montana, Utah, Wyoming 1.411 1.113

24 Arizona 1.416 1.115

25 Nevada, New Mexico 1.353 1.118

26 California 1.416 1.115

27 Oregon, Washington 1.416 1.115

28 Alaska 1.416 1.115

29 Hawaii 1.416 1.115

30 West Virginia 1.357 1.099

In commercial application, DOE assigned all states to one of the nine CBECS regions

used in the analysis and then calculated shipment-weighted baseline and incremental markup 

averages for each region. The results are summarized in Table 6.6.2.
6-17

Table 6.6.2 Regional Wholesaler Markups for Residential Boilers in Commercial 

Application 

CBECS 

Regions Census Divisions Baseline MU

Incremental 

MU

1 New England 1.366 1.081

2 Middle Atlantic 1.360 1.091

3 East North Central 1.360 1.099

4 West North Central 1.362 1.099

5 South Atlantic 1.351 1.105

6 East South Central 1.344 1.104

7 West South Central 1.348 1.119

8 Mountain 1.372 1.106

9 Pacific 1.416 1.115

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 mentioned in Section 6.4.2. DOE was able to 

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

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

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

6.6.3) and found that the incremental markup is around 20 percent lower than the baseline 

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

baseline markup 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.)

In order to estimate the baseline and incremental markups for both replacement and new 

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

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

Section 6.5.3.2 to the statewide baseline and incremental markups. DOE assumed that this 

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

incremental markups. 

Lastly, DOE divided all states among the 30 RECS regions and then calculated shipmentweighted average baseline and incremental markups for mechanical contractors for each region

in residential application, as shown in Table 6.6.3.
6-18

Table 6.6.3 Shipment-Weighted Mechanical Contractor Markups for Residential Boilers

in Residential Application 

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

then calculated shipment-weighted average baseline and incremental markups for mechanical 

contractors for each region, as shown in Table 6.6.4.

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 1.551 1.241 1.443 1.154

2 Massachusetts 1.538 1.231 1.431 1.145

3 New York 1.600 1.280 1.488 1.191

4 New Jersey 1.583 1.267 1.473 1.178

5 Pennsylvania 1.479 1.183 1.375 1.100

6 Illinois 1.577 1.262 1.467 1.173

7 Indiana, Ohio 1.557 1.245 1.448 1.158

8 Michigan 1.530 1.224 1.423 1.138

9 Wisconsin 1.510 1.208 1.404 1.123

10 Iowa, Minnesota, North Dakota, 

South Dakota 1.522 1.218 1.416 1.133

11 Kansas, Nebraska 1.437 1.149 1.336 1.069

12 Missouri 1.479 1.183 1.376 1.101

13 Virginia 1.557 1.246 1.448 1.158

14 Delaware, District of Columbia, 

Maryland 1.488 1.190 1.384 1.107

15 Georgia 1.474 1.179 1.371 1.096

16 North Carolina, South Carolina 1.481 1.184 1.377 1.102

17 Florida 1.512 1.210 1.407 1.125

18 Alabama, Kentucky, Mississippi 1.561 1.248 1.451 1.161

19 Tennessee 1.477 1.182 1.374 1.099

20 Arkansas, Louisiana, Oklahoma 1.570 1.256 1.460 1.168

21 Texas 1.498 1.198 1.393 1.115

22 Colorado 1.531 1.225 1.424 1.139

23 Idaho, Montana, Utah, Wyoming 1.473 1.178 1.370 1.096

24 Arizona 1.580 1.264 1.470 1.176

25 Nevada, New Mexico 1.553 1.242 1.444 1.155

26 California 1.607 1.286 1.495 1.196

27 Oregon, Washington 1.573 1.258 1.463 1.170

28 Alaska 1.766 1.413 1.642 1.314

29 Hawaii 1.835 1.468 1.707 1.366

30 West Virginia 1.528 1.222 1.421 1.137
6-19

Table 6.6.4 Shipment-Weighted Mechanical Contractor Markups for Residential Boilers

in Commercial Application 

6.6.3 Estimation of General Contractor Markups

In order to derive regional general contractor markups for the residential building 

construction sector from the 2007 Economic Census, DOE combined 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). Similarly, DOE used the Commercial 

Building Construction series (NAICS 236220) from the 2007 Economic Census to derive 

regional general contractor markups for the commercial application of residential 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 estimated the 

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

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

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

markups for each state. Lastly, DOE divided all states among the 30 RECS regions and nine 

CBECS regions; then calculated shipment-weighted average baseline and incremental markups

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

results are summarized in Table 6.6.5 for residential application Table 6.6.6 for commercial 

application (Table 6-A.4.2 and Table 6-A.4.3 in appendix 6-A.4 contains the full set of data.)

CBECS 

Regions

Census Divisions Replacement 

Baseline MU

Replacement 

Incremental 

MU

New 

Construction 

Baseline MU

New 

Construction 

Incremental 

MU

1 New England 1.546 1.237 1.438 1.150

2 Middle Atlantic 1.570 1.256 1.460 1.168

3 East North Central 1.547 1.238 1.439 1.151

4 West North Central 1.517 1.213 1.411 1.128

5 South Atlantic 1.504 1.203 1.399 1.119

6 East South Central 1.518 1.214 1.411 1.129

7 West South Central 1.539 1.231 1.432 1.145

8 Mountain 1.519 1.215 1.413 1.130

9 Pacific 1.598 1.278 1.486 1.189
6-20

Table 6.6.5 General Contractor Markups for Residential Boilers in Residential 

Application

RECS 

Regions State(s) Baseline MU

Incremental 

MU

1 Connecticut, Maine, New Hampshire, Rhode Island, Vermont 1.363 1.241

2 Massachusetts 1.343 1.222

3 New York 1.393 1.267

4 New Jersey 1.503 1.368

5 Pennsylvania 1.362 1.239

6 Illinois 1.589 1.446

7 Indiana, Ohio 1.381 1.257

8 Michigan 1.537 1.399

9 Wisconsin 1.340 1.219

10 Iowa, Minnesota, North Dakota, South Dakota 1.375 1.252

11 Kansas, Nebraska 1.354 1.232

12 Missouri 1.325 1.206

13 Virginia 1.450 1.320

14 Delaware, District of Columbia, Maryland 1.423 1.295

15 Georgia 1.428 1.300

16 North Carolina, South Carolina 1.399 1.273

17 Florida 1.528 1.391

18 Alabama, Kentucky, Mississippi 1.364 1.241

19 Tennessee 1.353 1.231

20 Arkansas, Louisiana, Oklahoma 1.440 1.310

21 Texas 1.499 1.364

22 Colorado 1.499 1.364

23 Idaho, Montana, Utah, Wyoming 1.297 1.180

24 Arizona 1.707 1.553

25 Nevada, New Mexico 1.617 1.471

26 California 1.717 1.562

27 Oregon, Washington 1.498 1.363

28 Alaska 1.854 1.687

29 Hawaii 1.417 1.289

30 West Virginia 1.545 1.406
6-21

Table 6.6.6 General Contractor Markups for Residential Boilers in Commercial 

Application

CBECS 

Regions Census Division Baseline MU

Incremental 

MU

1 New England 1.326 1.205

2 Middle Atlantic 1.424 1.294

3 East North Central 1.313 1.193

4 West North Central 1.337 1.215

5 South Atlantic 1.296 1.177

6 East South Central 1.285 1.167

7 West South Central 1.367 1.242

8 Mountain 1.235 1.122

9 Pacific 1.244 1.130

6.7 SALES TAX

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

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

price. DOE only applied the sales tax to the consumer price of the equipment in the replacement 

market, not the new construction market. The common practice for selling larger residential 

appliances like 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 consumers. Therefore, no additional sales tax is 

necessary to calculate the consumer equipment price for the new construction market.

DOE derived 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 derived 

shipment-weighted average tax values for each RECS and CBECS 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.
6-22

Table 6.7.1 Average Sales Tax Rates by RECS Region

RECS 

Regions State(s) Fraction of Total Shipments (2008-2012)

Tax Rate 

(2013) %

1 Connecticut, Maine, New Hampshire, Rhode Island, 

Vermont 16.0% 3.19%

2 Massachusetts 11.3% 6.25%

3 New York 25.6% 8.40%

4 New Jersey 10.5% 6.95%

5 Pennsylvania 10.1% 6.40%

6 Illinois 3.4% 8.05%

7 Indiana, Ohio 2.2% 7.07%

8 Michigan 1.8% 6.00%

9 Wisconsin 2.4% 5.45%

10 Iowa, Minnesota, North Dakota, South Dakota 3.1% 6.96%

11 Kansas, Nebraska 0.1% 6.76%

12 Missouri 0.2% 7.45%

13 Virginia 1.8% 5.60%

14 Delaware, District of Columbia, Maryland 5.5% 5.79%

15 Georgia 0.0% 7.05%

16 North Carolina, South Carolina 0.2% 6.94%

17 Florida 0.0% 6.65%

18 Alabama, Kentucky, Mississippi 0.1% 6.33%

19 Tennessee 0.1% 9.45%

20 Arkansas, Louisiana, Oklahoma 0.1% 8.71%

21 Texas 0.1% 7.90%

22 Colorado 1.5% 6.05%

23 Idaho, Montana, Utah, Wyoming 0.7% 3.36%

24 Arizona 0.1% 7.15%

25 Nevada, New Mexico 0.4% 6.89%

26 California 0.5% 8.45%

27 Oregon, Washington 2.0% 7.78%

28 Alaska 0.3% 1.30%

29 Hawaii 0.0% 4.40%

30 West Virginia 0.1% 6.10%

Shipment-Weighted National Average 6.45%
6-23

Table 6.7.2 Average Sales Tax Rates by CBECS Region

CBECS 

Regions Census Divisions Fraction of Total Shipments (2008-2012)

Tax Rate 

(2013) %

1 New England 27.3% 4.46%

2 Middle Atlantic 46.1% 7.63%

3 East North Central 9.8% 6.81%

4 West North Central 3.4% 6.98%

5 South Atlantic 7.5% 5.77%

6 East South Central 0.2% 7.93%

7 West South Central 0.2% 8.37%

8 Mountain 2.7% 5.46%

9 Pacific 2.7% 7.27%

Shipment-Weighted National Average 6.45%

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 used the overall baseline markup to estimate the consumer product price of baseline 

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

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

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

markup to determine the product price for baseline models.

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

Eq. 6.8.4

Where:

CPPBASE = consumer product 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 used the overall incremental markup to estimate changes in the consumer 

product price, given changes in the manufacturer cost from the baseline model cost resulting 

from an energy conservation standard to raise product energy efficiency. The total consumer 

product price for more energy-efficient models is composed of two components: the consumer 

product price of the baseline model and the change in consumer product price associated with the 

increase in manufacturer cost to meet the new energy conservation standard. The following 

equation shows how DOE used the overall incremental markup to determine the consumer 

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

standards). 
6-24

( )

BASE MFG OVERALL INCR

STD MFG OVERALL BASE MFG MFG INCR SALES

CPP COST MU

CPP COST MU COST MU MU Tax

_

_

= + ∆ ×

= × + ∆ × × ×

Eq. 6.8.5

Where:

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

CPPBASE = consumer product 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 (product of manufacturer markup, baseline 

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

MUOVERALL_INCR = incremental overall markup.

National average baseline and incremental markups for each market participant are 

summarized in Table 6.8.1 and Table 6.8.2 for residential boilers. Based on residential boiler

shipment forecasts for the year 2020 (see chapter 9), DOE estimated that 20 percent of gas-fired 

and electric hot water boilers, 5 percent of oil hot water boilers, and 0 percent of gas-fired, oilfired, and electric steam boilers go to new construction. On the other hand, 80 percent of gasfired and electric hot water boilers, 95 percent of oil hot water boilers, and 100 percent of gasfired, oil-fired, and electric steam boilers go to the replacement market. By weighing the 

markups by the market shares for each type of residential boiler and market, total markups are 

listed in Table 6.8.3.

Table 6.8.1 Summary of Overall Markups on Residential Boilers in Residential 

Application

Replacement New Construction

Baseline 

Markup

Incremental 

Markup

Baseline 

Markup

Incremental 

Markup

Manufacturer 1.41 1.41

Wholesaler 1.36 1.10 1.36 1.10

Mechanical 

Contractor

1.53 1.22 1.45 1.15

General Contractor -- -- 1.47 1.34

Sales Tax 1.06 1.06 -- --

Overall Markup 3.12 2.01 4.09 2.39
6-25

Table 6.8.2 Summary of Overall Markups on Residential Boilers in Commercial 

Application

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 1.36 1.10 1.36/1.10 1.36 1.10 1.36/1.10

Mechanical 

Contractor 1.53 1.22 -- 1.45 1.15 --

General 

Contractor -- -- -- 1.31 1.19 --

Sales Tax 1.06 1.06 1.06 -- -- 1.06

Overall 

Markup 3.12 2.01 2.04/1.64 3.64 2.12 2.04/1.64

Table 6.8.3 Summary of Total Markup by Residential Boiler Product Class 

Product Class Baseline Markup Incremental Markup

Gas-fired hot water boiler 3.15 1.99

Gas-fired steam boiler 3.15 1.99

Oil-fired hot water boiler 3.00 1.96

Oil-fired steam boiler 3.15 1.99

Electric hot water boiler 3.10 2.01

Electric steam boiler 3.15 1.99
6-26

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6-27

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