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CHAPTER 7. MARKUPS FOR EQUIPMENT PRICE DETERMINATION

TABLE OF CONTENTS

7.1 INTRODUCTION ..................................................... 7-1

7.2 OVERVIEW OF MARKUP EQUATIONS ................................. 7-1

7.3 ESTIMATION OF INSTALLED PRICE ................................... 7-2

7.3.1 Estimation of Transformer Weights and Pole Costs ..................... 7-3

7.3.2 Overhead and Profit for Installation Expenses ......................... 7-4

7.3.3 Dry-Type Transformer Installed Price Equation ........................ 7-5

7.3.4 Liquid-Immersed Transformer Installed Price Equation .................. 7-5
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CHAPTER 7. MARKUPS FOR EQUIPMENT PRICE DETERMINATION

7.1 INTRODUCTION

This chapter of the technical support document (TSD) presents the Department's method

for deriving transformer prices. The objective of the equipment price determination is to

estimate the price paid by the customer/purchaser for an installed transformer. Purchase price

and installation cost are necessary inputs to the life-cycle cost (LCC) and payback period (PBP)

analyses. Chapter 8 presents the LCC calculations; section 8.2.1 describes how the LCC uses

purchase price and installation cost as inputs.

Purchase prices for distribution transformers are not generally known. Transformers are

specialty items, often custom-built with unlisted prices. The engineering analysis (Chapter 5)

provided the manufacturer selling prices for the units analyzed by the LCC. The Department

derived a set of prices for each transformer design produced by the engineering analysis by

applying markups to the manufacturer selling price in the form of markup equations. These

markups represent all the costs associated with bringing a manufactured transformer into service

as an installed piece of electrical equipment at a customer’s site. 

7.2 OVERVIEW OF MARKUP EQUATIONS

Depending on the purchasing environment, the Department used different markup

equations to capture the various markups in the supply chain between the manufacturer and the

customer. For example, electric utilities (except for the rural electric cooperatives) typically

purchase liquid-immersed transformers through manufacturer representatives or distributors. 

The manufacturer selling price plus the small distributor markup is generally the utilities’ price

for transformers. Dry-type transformers go through several additional marketing and/or handling

steps before they are installed by the end-use purchaser.

The Department adjusted the advance notice of proposed rulemaking (ANOPR)

distributor markup assumptions based on stakeholder feedback. Liquid-type distribution

transformers have a seven percent markup, accounting for distributor markup. The manufacturer

selling prices for dry-type transformers include two price markups: a distributor markup of 15

percent and a contractor materials markup of 10 percent. The Department based these markups

(expressed as average multipliers) on RS Means Electrical Cost Data 2002.1 The distributor

markup converts the manufacturer selling price to the distributor price, the price paid by the

electrical contractor. This distributor markup covers the costs of the distribution business,

including sales labor, warehousing, overhead, and profit. Then the contractor applies a markup

to the distributor price to cover contractor overhead and profit.

For both liquid-immersed and dry-type transformers, the Department added shipping

costs, sales tax, an installation labor and equipment markup, and weight-dependent installation

costs. Distribution transformers can be very heavy (some weigh more than a ton) and costly to
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ship. It is common practice for transformers to be shipped directly to a construction site with no

intermediate warehousing. The Department estimated shipping costs by collecting a small

sample of quotations for transporting transformers. Based on an average shipping distance of

1,000 miles, the Department estimated shipping costs of $0.20/pound for large shipments. Using

RS Means Electrical Cost Data 2002, DOE estimated an installation labor and equipment

markup of 52 percent. By weighting the sales tax for each individual State by its population, the

Department calculated a national average sales tax of 5.6 percent. Finally, the Department added

installation costs. The installation cost is the cost of labor, equipment, and materials (other than

the transformer itself) needed to install a distribution transformer. The Department developed

several empirical equations for estimating installation costs as a function of transformer weight.

7.3 ESTIMATION OF INSTALLED PRICE

The Department estimated the installation costs and contractor markups on transformers

by fitting a linear cost function to the RS Means electrical cost data. The RS Means data break

down the total installed cost for transformers in terms of four cost components:

1. Materials: transformer purchase price, including mounting hardware.

2. Labor: labor cost required for installation, including unloading and uncrating, hauling

within 200 feet of the loading dock, setting in place, connecting to the distribution

network, and testing.

3. Equipment: equipment rentals necessary for completion of the installation.

4. Overhead and Profit: installation overhead and profit expenses for the contractor (for

dry-type transformers only).

The Department disaggregated its installation costs into these four cost components. RS

Means lists the transformer price as a “material” cost. The Department performed a regression to

disaggregate the overhead and profit associated with installation labor and equipment rental from

the overhead and profit associated with the transformer (material) cost. The regression equation

is:

O&P = a × Mat + b × L&E + c Eq. 7.1

where:

O&P = the overhead and profit expense (2001$),

Mat = the material cost (i.e., transformer and hardware) (2001$),

L&E = the direct labor and equipment costs of installation (2001$), and 
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a, b, and c = the computed linear regression coefficients.

The Department fitted the labor and equipment costs as a function of transformer weight. 

This relationship is justified because transformer weight (and its correlated size) is a significant

factor in determining installation costs for labor and equipment. For pole-mounted transformers,

the Department assumed pole costs did not vary with changes in efficiency but recognized that,

in some cases, a more efficient, heavier transformer could require a stronger pole. Because the

RS Means data do not specify transformer weight, the Department inferred the approximate

weight of a transformer from its kVA (kilovolt-ampere) capacity, as described below.

For use in the LCC analysis, the Department adjusted these 2001$ to 2004$ using the

gross domestic product (GDP) price deflator from the Energy Information Administration

(EIA)’s Annual Energy Outlook 2005 (AEO2005).

7.3.1 Estimation of Transformer Weights and Pole Costs

The Department derived the weight-versus-capacity relationship for typical transformers

from the design data produced by the engineering analysis. It used the weight-versus-capacity

relationship to estimate the transformer weight corresponding to the transformer costs reported in

RS Means. The Department estimated a scaling relationship between transformer weight and

direct installation labor and equipment costs by fitting the correlation between weight and

installation costs to a power-law equation.

In evaluating design options and the impact of potential standard levels, the Department

examined the potential for new standards for distribution transformers to lessen the utility or

performance of these products. Stakeholders mentioned in their comments to the Department

that heavy, more-efficient transformers could have lessened utility due to impacts on utility pole

requirements for overhead transformers. For single-phase, pole-mounted, liquid-immersed

transformers, the Department estimated the additional installation costs for those designs that

would require an upgrade to the pole based on cost data provided by stakeholders. 

For the NOPR analysis, the Department added a pole-replacement cost function to the

installation cost equation for design line 2, which covers pole-mounted transformers. This

analysis assumed that a pole change-out cost of $2,000 occurs for up to 25 percent of

pole-mounted transformers when the weight of the transformer exceeds 1,000 pounds. The

Department also included a transformer pole support cost of $0.12/lb to account for the cost of a

sturdier pole. The pole cost equation is included in the LCC spreadsheet tool for DL2 so that

stakeholders can conduct sensitivity analyses regarding pole replacement costs. Because not all

transformer installations require a change-out of existing equipment even in the most extreme

case, the Department assumed a maximum change-out fraction. The Department selected 25

percent as the maximum change-out fraction estimate based on stakeholder input.2
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The method for deriving the weight-versus-capacity relationship uses a typical

transformer weight from the engineering analysis. The Department defined the typical weight as

the minimum weight plus 20 percent times the weight range, where the weight range is the

difference between the minimum and maximum transformer weight for the selected designs.

From these data, the Department obtained the following power-law relationship for

transformer weight as a function of capacity and basic impulse insulation level (BIL) rating:

Weight = 13.13× kVA0.765 × BIL0.244 Eq. 7.2

where: 

Weight = the weight of the transformer (lbs), 

kVA = the capacity of the transformer (kVA), and

BIL = the BIL rating of the transformer (kV). 

Although RS Means does not provide transformer weights, it does provide transformer

capacity and primary voltage. The Department estimated weight from capacity and BIL, which it

estimated using primary voltage. The Department then compared the weight to the direct

installation costs from the labor and equipment to obtain a power-law relationship.

The first regression performed was the installation direct labor and equipment costs as a

function of transformer weight. Data analyzed included all 115 distribution transformer kVA

ratings spanning the three RS Means electrical equipment categories: “dry type transformer”

(16270-200), “oil-filled transformer” (16270-600), and “transformer, liquid-filled” (16270-610). 

The resulting correlation equation is:

L&E = 42.08 × Weight0.46 Eq. 7.3

where: 

L&E = the installation, direct labor, and equipment costs (2001$), and

Weight = the transformer weight (lbs).

The regression, performed as a power-law trend line fit in Excel, resulted in an R-square

of 0.95, indicating a good fit to the data.

7.3.2 Overhead and Profit for Installation Expenses

The next regression targeted contractor overhead and purchase profit expenses in terms of

a markup on materials (i.e., the transformer), and labor and equipment (i.e., direct installation). 

Initially, the Department performed a linear regression with a constant term. When it found that

the constant term was not significantly different from zero, it ran the regression again. The

resulting equation is:

O&P = 0.10 × Mat + 0.52 × L&E Eq. 7.4
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The Department used equation 7.4 to allocate overhead and profit expenses to a markup

on the distributor price and a separate markup on the direct labor and equipment costs for the

installation.

7.3.3 Dry-Type Transformer Installed Price Equation

For dry-type transformers, the result of these analytical steps is a total installed cost

equation as a function of the manufacturer selling price and transformer weight:

Installed_Price = Mtax × (ML&E × L&E + MMat × (MShip × Weight + MDist × ManPrice)) Eq. 7.5

where:

Installed_Price = the final installed price of the transformer (2004$),

Mtax = the factor that accounts for sales tax, estimated as 1.054,

ML&E = the factor that accounts for the markup on direct installation labor

and equipment costs, estimated as 1.52,

L&E = the installation, direct labor, and equipment costs (2001$), adjusted

to 2004$ using the GDP price deflator from AEO2005,

MMat = the factor that accounts for the contractor markup on the purchase

of the transformer from the distributor, estimated as 1.10,

MShip = the shipping cost, estimated as $0.20/lb,

Weight = the transformer weight (lbs),

MDist = the average distributor markup factor, estimated as 1.15, and

ManPrice = the manufacturer's selling price (2004$).

The Department applied the installed cost equation by using the manufacturer price and

weight from the engineering analysis. For example, the engineering analysis estimated that the

design line 9 (three-phase, 300 kVA) transformer with the minimum manufacturer price weighs

491 pounds and has a manufacturer price of $4838.17. For this transformer, the Department

estimated the installed cost to be $8935.41, where $2082.73 is the installation cost, and $6852.68

is the transformer retail price, including shipping costs, sales tax, and markups.

7.3.4 Liquid-Immersed Transformer Installed Price Equation

For liquid-immersed transformers, the Department removed the contractor markup from

the cost equation to obtain : 

Installed_Price = Mtax × (ML&E × L&E × (MShip × Weight + MDist × ManPrice)) Eq. 7.6

where:
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Installed_Price = the final installed price of the transformer (2004$),

Mtax = the factor that accounts for sales tax, estimated as 1.054,

ML&E = the factor that accounts for the markup on direct installation labor

and equipment costs, estimated as 1.52,

L&E = the installation, direct labor, and equipment costs (2001$), adjusted

to 2004$ using the GDP price deflator from AEO2005,

MShip = the shipping cost, estimated as $0.20/lb,

Weight = the transformer weight (lbs.),

MDist = the average distributor markup factor, estimated as 1.07, and

ManPrice = the manufacturer's selling price (2004$).

As with the dry-type transformers, the Department applied the installed cost equation by

using the manufacturer price and weight from the engineering analysis. For example, the

engineering analysis estimated that the design line 1 (single-phase, 50 kVA) transformer with the

minimum manufacturer price weighs 646 pounds and has a manufacturer price of $818.00. For

this transformer, the Department estimated the installed cost to be $2381.42, where $1322.72 is

the installation cost, and $1058.70 is the transformer price for the utility, including shipping cost,

sales tax, and markups.
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REFERENCES

1. RS Means Company Inc. Electrical Cost Data: 26th Annual Edition. 2003. ed. J.H.

Chiang. Kingston, MA. 

2. Rosenstock, S. ANOPR for Distribution Transformers, Docket # EE-RM/STD-00-550,

RIN #1904-AB08, comment No. 63. November 8, 2004. Edison Electric Institute.