K-i



### APPENDIX K. DETAILED DATA FOR EQUIPMENT PRICE MARKUPS
TABLE OF CONTENTS

K.1 INTRODUCTION

...................................................K-1 K.2 DETAILED WHOLESALER COST DATA

...............................K-1 K.3 DETAILED GENERAL CONTRACTOR COST DATA

......................K-2 K.4 DETAILED MECHANICAL CONTRACTOR DATA

.......................K-3 K.5 ESTIMATION OF WHOLESALER AND CONTRACTOR MARK-UP STANDARD DEVIATIONS

...........................................K-4

LIST OF TABLES Table K.2.1 Disaggregated Costs and Expenses for Wholesalers

....................K-2 Table K.3.1 Disaggregated Costs and Expenses for General Contractors

..............K-3 Table K.4.1 Disaggregated Costs and Expenses for Mechanical Contractors

........... K-4 Table K.5.1 Wholesale Baseline Markups by State

...............................K-6 Table K.5.2 General Contractor Baseline Markups by State

........................K-7 Table K.5.3 Mechanical Contractor Baseline Mark-ups by State

....................K-8aTable K.2.1 presents wholesalercosts and expenses aspercentagevalues as opposed toper dollar of sales revenue

values, as shown in Table 7.3.1.

K-1 

### APPENDIX K. DETAILED DATA FOR EQUIPMENT PRICE MARKUPS

K.1 INTRODUCTION This appendix provides further details on information presented in Chapter 7, Markups for Equipment Price Determination.

K.2 DETAILED WHOLESALER COST DATA Based on data provided in the1998 Wholesaler Profit Survey Reportof the Airconditioning & Refrigeration Wholesalers Association (ARW), Table 7.3.1 of Chapter 7, section 7.3,Estimation of Wholesale Mark-upsshows wholesaler revenues and costs in aggregated form. Table K.2.1 below provides the complete breakdown of costs and expenses as provided in the 1998 Wholesaler Profit Survey Report

.a

### The column labeled “Scaling” in Table K.2.1 indicates which expenses DOE assumed to scale with only direct “labor” costs and which scaled with “all direct” costs. As Chapter 7, section 7.3 describes, only those expenses that scale with “all direct” costs are marked-up when there is an incremental change in equipment costs.bTable K.3.1 presents general contractor costs and expenses first astotal dollar values and than as converted to percentagevalues. This is in contrast to theper dollar of sales revenuevalues shown in Table 7.4.1.

K-2 

### Table K.2.1 Disaggregated Costs and Expenses for Wholesalers Item Percent of Revenue Scaling Cost of Goods Sold 73.6% Gross Margin 26.4% Payroll Expenses Executive Salaries & Bonuses 2.7% Labor Inside Sales Salaries/Wages 3.2% Labor Outside Sales Salaries/Commissions 2.2% Labor Warehouse & Delivery Salaries/Wages 2.3% Labor All Other Salaries/Wages & Bonuses 2.1% Labor Payroll Taxes 1.1% Labor Group Insurance 0.7% Labor Benefit Plans 0.5% Labor Total Payroll Expenses 14.8% Occupancy Expenses Utilities: Heat, Light, Power, Water 0.4% Labor Telephone 0.6% Labor Building Repairs & Maintenance 0.2% Labor Rent or Ownership in Real Estate 2.4% Labor Total Occupancy Expenses 3.6% Other Operating Expenses Advertising and Promotion 0.9% All Costs Insurance 0.4% All Costs Depreciation 0.7% All Costs Bad Debt Losses 0.3% All Costs All Other Operating Expenses 3.2% All Costs Total Other Operating Expenses 5.4% Operating Profit 2.7% All Costs



### K.3 DETAILED GENERAL CONTRACTOR COST DATA Based on U.S. Department of Census data, Table 7.4.1 of Chapter 7, section 7.4, Estimation of General Contractor Mark-upsshows general contractor revenues and costs in aggregated form. Table K.3.1 below shows the complete breakdown of costs and expenses as the U.S. Department of Censusb

### provided. The column labeled “Scaling” in Table K.3.1 indicates which expenses DOE assumed to scale with only direct “labor” costs, and which scale with “all direct” costs. As Chapter 7, section 7.4 describes, only those expenses that scale with “all direct” costs are marked-up when there is an incremental change in equipment costs.cTable K.4.1 presents mechanicalcontractor costs and expenses aspercentagevaluesas opposed toper dollar of sales

revenuevalues, as shown in Table 7.5.1.

K-3 

### Table K.3.1 Disaggregated Costs and Expenses for General Contractors Item Dollar Value Percentage Scaling Cost of materials, components, and supplies (Direct Materials and Equipment Installed) $28,087,296 16.03%
Payroll, construction workers (Direct Labor) $10,797,116 6.16% Cost of construction work subcontracted out to others (Direct Subcontract) $101,952,864 58.18% Cost of selected power, fuels, and lubricants (Direct Other) $827,160 0.47% Total Cost of Sales $141,664,436 80.84% Gross Margin $33,566,396 19.16%
Operating Expenses Depreciation charges during year (Depreciation) $808,477 0.46% All Costs Rental cost for machinery, equipment, and buildings + Purchased communication services (Occupancy Costs) $1,657,257 0.95% Labor Fringe benefits, all employees (Payroll Taxes/Fringe Benefits) $4,524,436 2.58% Labor Payroll, other employees (Officer Salaries, Sales and Estimating Salaries, Administration Salaries, Warehouse Salaries) $8,379,046 4.78% Labor Cost of repairs to buildings and other structures + Cost of repairs to machinery and equipment (Vehicle/Maintenance Repairs) $558,930 0.32% All Costs Total Operating Expenses $15,928,146 9.09% Net Profit Before Income Taxes $17,638,250 10.07%



### K.4 DETAILED MECHANICAL CONTRACTOR DATA
Based on data in the 1995 edition ofFinancial Analysis for the HVACR Contracting Industry,which the Air Conditioning Contractors of America (ACCA) publishes, Table 7.5.1 of Chapter 7, section 7.5,Estimation of Mechanical Contractor Markupsshows mechanical contractor revenues and costs in aggregated form. Table K.4.1 below provides the complete breakdown of costs and expenses as provided in theFinancial Analysisreport.c

### The column labeled “Scaling” in Table K.4.1 indicates which expenses DOE assumed to scale with only direct “labor” costs and which scale with “all direct” costs. As Chapter 7, section 7.5 describes, only those expenses that scale with “all direct” costs are covered when there is an incremental change in equipment costs.K-4



### Table K.4.1 Disaggregated Costs and Expenses for Mechanical Contractors Item Percentage Scaling Direct Materials 22.70% Equipment Installed 14.22% Direct Labor 19.01% Direct Subcontract 5.55% Direct Other 3.97% Total Cost of Sales 65.45% Gross Margin 34.55% Operating Expenses Advertising 1.10% All Costs Bad Debts 0.16% All Costs Depreciation 1.02% All Costs Interest Expenses 0.33% All Costs Liability Insurance 1.12% All Costs Other Insurance 1.36% All Costs Occupancy Costs 1.24% Labor Payroll Taxes/Fringe Benefits 4.02% Labor Selling Expense 1.49% All Costs Officer Salaries 3.80% Labor Sales and Estimating Salaries 2.69% Labor Administration Salaries 3.18% Labor Warehouse Salaries 0.46% Labor Unapplied Labor 1.04% Labor Vehicle/Maintenance Repairs 1.82% All Costs Other Operating Expenses 5.13% All Costs Total Operating Expenses 29.96% Net Operating Profit 4.59% All Costs Other Income 0.79% All Costs Other Expenses -0.49% All Costs Net Profit Before Income Taxes 4.89%



### K.5 ESTIMATION OF WHOLESALER AND CONTRACTOR MARK-UP STANDARD DEVIATIONS The Department used U.S. Census survey data to estimate commercial air conditioner wholesaler, general contractor, and mechanical contractor markup distributions. The survey data include state-level heating, ventilating, and air-conditioning (HVAC) total value of work, number of firms, cost of goods sold, cost of subcontract work, cost of materials, and construction payroll (Tables K.5.1 through K.5.3). The Department used these data to calculate individual state baseline markups. The Department did not calculate markups for some small states because the Census Bureau withheld data for those states. The Department did not calculate the general contractor markup for one state, Nevada, because the data for that state are sufficiently different than for any other state.K-5



### Markups may vary across states for several reasons, including differences in firm size. For example, the average North Dakota wholesale firm sells $938,000 in goods and services annually and has a 1.85 baseline markup. The average Oregon wholesale firm sells $7,156,000 and has a 1.23 baseline mark-up (Table K.5.1). The Department estimated the size of the baseline markup distribution from the standard deviation of across-state markups. The wholesale markup standard deviation is 0.11, the general contractor markup standard deviation is 0.05, and the mechanical contractor markup standard deviation is 0.04. These standard deviations suggest that wholesale markups vary more than general contractor or mechanical contractor markups, a result that seems reasonable because there are fewer firms, and thus less competition, at the wholesale level than at the builder or contractor distribution levels. The Department assumed that new construction and replacement market mechanical contractor markups have the same relative standard deviation as that developed from the baseline markups for all contractors. The Department defined the relative standard deviation as the standard deviation as a percent of the baseline markup. The wholesale relative standard deviation is 8.2 percent, the general contractor relative standard deviation is 3.9 percent, and the mechanical contractor relative standard deviation is 3.1 percent of their respective baseline markups. The fact that the mechanical contractor relative standard deviation is 3.1 percent of the baseline markup implies that the standard deviation for the new and replacement markets, relative to their respective baseline markups, is also 3.1 percent. The Department also assumed that wholesale, general contractor, and mechanical contractor incremental markups have the same relative standard deviation as wholesale, general contractor, and mechanical contractor baseline markups. It used this assumption to calculate the standard deviation of wholesale, general contractor, and mechanical contractor incremental markups.K-6



### Table K.5.1 Wholesale Baseline Markups by State States with Available Data Number

of Firms Total Sales

($000) Average Firm Size

($000) Cost of Goods Sold

($000) Baseline

Markup Alabama 106 310,246 2,927 230,160 1.35 Arizona 70 281,826 4,026 216,368 1.30 Arkansas 51 109,982 2,157 83,093 1.32 California 325 1,037,453 3,192 688,575 1.51 Colorado 67 206,248 3,078 153,600 1.34 Connecticut 43 161,945 3,766 113,816 1.42 Florida 387 1,037,529 2,681 720,113 1.44 Georgia 179 577,898 3,228 426,361 1.36 Illinois 198 529,087 2,672 379,812 1.39 Indiana 113 391,395 3,464 288,678 1.36 Kentucky 84 227,761 2,711 167,535 1.36 Louisiana 118 272,837 2,312 202,058 1.35 Maryland 92 312,671 3,399 251,925 1.24 Michigan 159 526,458 3,311 402,887 1.31 Minnesota 62 260,501 4,202 175,585 1.48 Missouri 114 265,762 2,331 195,549 1.36 Montana 16 28,924 1,808 20,059 1.44 New Jersey 155 462,301 2,983 329,644 1.40 New York 217 578,251 2,665 419,642 1.38 North Caroline 201 683,453 3,400 465,177 1.47 North Dakota 6 5,625 938 3,038 1.85 Ohio 193 542,633 2,812 391,311 1.39 Oklahoma 80 198,092 2,476 147,117 1.35 Oregon 45 322,038 7,156 262,250 1.23 South Carolina 100 254,564 2,546 170,129 1.50 Tennessee 128 619,069 4,836 459,644 1.35 Texas 459 1,267,425 2,761 911,112 1.39 Virginia 122 407,048 3,336 304,818 1.34 Washington 87 273,753 3,147 183,174 1.49 Wisconsin 85 294,943 3,470 238,470 1.24 Average Markup 1.39 Standard Deviation 0.11K-7



### Table K.5.2 General Contractor Baseline Markups by State

States with Available Data Number

of Firms Value of

Construction ($000) Average

Firm Size ($000) Cost of

Subcontract Work ($000) Cost of

Materials ($000) Construction

Payroll ($000) Baseline

Markup Alabama 620 3,671,344 5,922 1,938,672 891,334 223,420 1.20 Arizona 684 3,207,554 4,689 2,115,160 461,056 132,227 1.18 Arkansas 296 1,581,357 5,342 813,659 346,693 88,820 1.27 California 3722 17,972,242 4,829 11,428,343 2,376,960 1,105,505 1.21 Colorado 722 4,097,791 5,676 2,701,063 624,008 192,516 1.16 Connecticut 421 2,053,545 4,878 1,326,976 270,198 101,770 1.21 Florida 1975 8,209,136 4,157 4,984,231 1,272,181 423,086 1.23 Illinois 1439 7,622,243 5,297 4,830,124 961,727 499,422 1.21 Indiana 842 3,221,499 3,826 1,680,696 588,727 279,203 1.26 Iowa 579 1,509,129 2,606 679,536 400,534 164,324 1.21 Kentucky 532 1,546,834 2,908 834,196 283,717 121,643 1.25 Louisiana 526 1,516,624 2,883 798,086 313,290 121,031 1.23 Maine 239 305,850 1,280 143,347 73,147 24,054 1.27 Maryland 910 5,069,038 5,570 2,906,817 825,685 296,674 1.26 Michigan 1261 4,691,150 3,720 2,849,590 734,559 264,675 1.22 Minnesota 702 4,205,630 5,991 2,587,111 683,656 285,175 1.18 Mississippi 318 1,759,778 5,534 839,964 471,620 144,351 1.21 Missouri 746 4,526,190 6,067 2,731,605 967,587 322,037 1.13 Nevada* 254 2,357,883 9,283 1,018,206 218,406 203,157 1.64 New Jersey 918 4,345,635 4,734 2,196,849 726,720 293,666 1.35 New York 2743 11,335,125 4,132 7,236,674 1,459,728 646,693 1.21 North Carolina 919 5,362,934 5,836 3,069,432 1,092,447 321,427 1.20 Ohio 1582 5,682,205 3,592 3,186,775 940,113 408,422 1.25 Oregon 635 2,686,263 4,230 1,673,248 463,588 163,376 1.17 Pennsylvania 1317 7,026,616 5,335 4,059,173 1,138,910 485,052 1.24 South Carolian 355 1,656,716 4,667 780,080 356,487 108,530 1.33 Tennessee 603 3,867,887 6,414 2,341,046 720,239 235,680 1.17 Texas 2857 12,574,184 4,401 7,532,096 2,015,494 606,620 1.24 Utah 330 2,117,642 6,417 1,328,584 340,226 113,326 1.19 Virginia 1018 4,566,645 4,486 2,732,596 799,822 269,492 1.20 Washington 1084 4,212,206 3,886 2,449,727 834,143 341,591 1.16 Wisconsin 663 3,497,723 5,276 1,709,278 711,185 339,862 1.27 Average Markup 1.22 Standard Deviation 0.05 * Data not used in determination of average markup and standard deviation.K-8



### Table K.5.3 Mechanical Contractor Baseline Mark-ups by State

State Number of

Firms Total Value

of Work ($000) Average

Firm Size ($000) Cost of

Subcontract Work ($000) Cost of

Materials ($000) Construction

Payroll ($000) Baseline

Markup Alabama 1413 1227115 868 71884 469589 261627 1.53 Alaska 187 191222 1023 26999 62114 39063 1.49 Arizona 1344 1558535 1160 105390 670620 314727 1.43 Arkansas 980 587503 599 38859 233542 123406 1.48 California 6776 8179446 1207 752768 3074373 1829630 1.45 Colorado 1654 1693660 1024 163179 681129 360281 1.41 Connecticut 1254 1004514 801 92352 363915 211448 1.50 Delaware 288 409763 1423 33040 137526 97407 1.53 Florida 4803 4270074 889 387328 1743206 808674 1.45 Georgia 2589 2707372 1046 226200 1068051 509764 1.50 Hawaii 243 262209 1079 31120 84395 53728 1.55 Idaho 546 534485 979 71998 203012 99646 1.43 Illinois 3756 4666573 1242 421160 1612309 1111017 1.48 Indiana 1973 2415608 1224 248396 880509 551694 1.44 Iowa 938 941814 1004 90092 333338 201583 1.51 Kansas 1065 991048 931 88986 413221 199495 1.41 Kentucky 1178 1069652 908 71707 420424 233198 1.47 Louisiana 1200 1032992 861 123727 390003 189221 1.47 Maine 552 271742 492 22337 109332 54823 1.46 Maryland 2037 2706074 1328 431681 996255 518575 1.39 Massachusetts 2172 2197054 1012 354209 788930 404929 1.42 Michigan 3187 3345829 1050 386971 1168701 704768 1.48 Minnesota 1416 1744406 1232 185449 645039 376324 1.45 Mississippi 746 561720 753 37622 246454 104011 1.45 Missouri 1824 1850266 1014 223236 630723 411300 1.46 Montana 412 248138 602 20278 110880 51205 1.36 Nebraska 662 585515 884 54614 228098 126247 1.43 Nevada 515 881622 1712 70133 355908 194926 1.42 New Hampshire 462 362465 785 42964 140289 68677 1.44 New Jersey 3320 2809386 846 348499 995667 578431 1.46 New Mexico 600 393575 656 35545 155469 93895 1.38 New York 5234 5292794 1011 665391 1887074 1012489 1.48 North Carolina 3057 2989371 978 238119 1184341 608150 1.47 North Dakota 248 225388 909 20210 84540 52237 1.44 Ohio 3329 3847492 1156 484047 1349187 841751 1.44 Oklahoma 1156 737958 638 59705 291994 134307 1.52 Oregon 1079 1349767 1251 148845 498268 332455 1.38 Pennsylvania 3546 4001213 1128 431042 1485212 830817 1.46 Rhode Island 356 240887 677 36581 91233 43832 1.40 South Carolina 1351 1189389 880 109630 484566 262120 1.39 South Dakota 311 171663 552 15506 71723 34206 1.41K-9

Tennessee 1612 1940866 1204 187255 815782 380309 1.40 Texas 5516 5988883 1086 571356 2482127 1147065 1.43 Utah 835 899015 1077 114587 313840 173567 1.49 Vermont 245 149893 612 11891 55013 33780 1.49 Virginia 2391 2109902 882 143031 863964 475238 1.42 Washington 1746 1894359 1085 134056 693627 417457 1.52 West Virginia 496 307942 621 15757 138747 66039 1.40 Wisconsin 1981 2108422 1064 168459 740090 512820 1.48 Wyoming 264 130175 493 12688 52717 26025 1.42 Average Markup 1.45 Standard Deviation 0.04