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Inset lights are used to demarcate steps or areas with uplighting. In this project these 3" diameter lights are used for redwood deck steps.
Measure where to place the lighting on the steps. Using a Forstner bit, cut a 3" diameter hole that's only 7/8" deep with a flat bottom -- not a through hole. You can mark the 7/8" depth line on the drill bit by using a small piece of tape or a distinctive marking pen. The keys to using a forstner bit for a cut like this (through soft redwood) is keeping it perpendicular to the surface and going slowly.
An alternative to using a Forstner bit is to make a jig and cut with a router.
In the center of the hole, drill a 7/8" through hole using a spade bit or an auger bit.
Snap the light into place. Hook the lead wires (there are two) into your main power wire, pull the wires under the deck, and attach them to the transformer. Wrap the connections with electrical tape or wire caps.