Warranty Reimbursement –Post Pandemic

By Frank O’Brien

Just over three years after the government shutdown the economy due to the COVID-19 pandemic, the World Health Organization announced that the pandemic was over. Automotive dealers, some of the most resilient business owners in the country, navigated the pandemic, inventory supply issues caused by the microchip shortage, and workforce issues to generate record profits in 2021, 2022, and into 2023.

Now, as we head into the second half of 2023 and beyond, inventory levels (for most franchises) have started to build back up, and gross profits related to the sale of new and used cars have waned (albeit slightly). As this trend continues, the profits in the parts and service departments become increasingly important. However, rising costs, especially technician pay rates, have put a strain on those profits. Therefore, dealership management should focus on submitting for labor rate and parts markup increases annually.

Labor Submissions

The amended Massachusetts state franchise law, MGL Chapter 93B, permits dealers to submit for a labor increase once per calendar year. However, the average dealer waits 18 months to 2 years between submissions, sometimes longer. Meanwhile, the service department has lost incremental gross profits that cannot be recovered. Service directors should be increasing the retail door rate annually and tweaking the labor grid at the same time. The dollar value of each year’s increase should be calculated based on the year-over-year increases in technician’s pay rates, other personnel costs, operating expenses, and overhead on a cost-per-labor hour basis.

• Rate Index Programs: Certain manufacturers (e.g., Ford Motor Company (Ford), BMW of North America (BMWNA), and Toyota Motor Sales (TMS)) will offer dealers an automatic annual warranty labor rate increase based on the consumer price index. The rate is often lower than the rate the dealer can obtain through a warranty labor rate submission through Chapter 93B or other programs give the manufacturers carte blanche authority to lower the rate as they deem appropriate. We have seen instances in which the dealer’s final approved rate was significantly less than the repair order analysis, because the market rate survey included dealers that had not submitted for a labor rate increase in several years and/or were on a rate index program. states’ franchise laws. More importantly, the manufacturer locks the dealer into the program for a period of time (usually 3 years). Management should prepare an analysis to project the average retail labor rate prior to executing any OEM rate index programs.

• Discounts: Manufacturers have always calculated the average rates net of discounts. However, we are starting to see certain manufacturers (General Motors, BMW, Audi of America, Porsche of North America) separating labor and parts discounts in their calculations. This could be problematic for those dealerships that take a 70/30 or 60/40 split when allocating labor and parts discounts. All discounts should be prorated based on the value of the labor and parts sold on the repair order.

• Manufacturer Labor Rate Submission Programs: Most manufacturers allow dealers to prepare a warranty labor submission that requires a combination of a repair order analysis (usually 20-30 qualifying repair orders) and a market labor rate survey. Unfortunately, these

• Maintenance Items: Chapter 93B provides a maintenance exclusion in the law but provides little detail as to what constitutes maintenance. Certain manufacturers (e.g., Ford, BWWNA, FCA-Stellantis, Subaru of America, Porsche of NA, Mazda North America, and Volvo Cars of North America) have taken a rather liberal interpretation of the maintenance exclusion and require dealers to include brakes, wiper blades, keys, batteries, and bulbs. These items are often discounted, which will reduce the rate. Additionally, Ford requires dealers to include all alignments, even those done in conjunction with a tire replacement or caused by outside influence. Management personnel for these franchises should ensure that these services are competitively priced but not overly discounted and that the hours paid to the technicians are not above industry benchmarks.

• Non-Warranty Like Repairs: BMWNA is notorious for including extended warranty repairs in the submission despite the repair being paid by a third party. To avoid these repairs from negatively impacting your rates, management personnel should code all extended and aftermarket warranty repairs as W for warranty. Additionally, BMWNA and Ford take an extremely liberal interpretation of damage. Oftentimes, these manufacturers include repairs that were caused by some type of outside influence. While there is not much recourse for the dealer in this area, dealers should be aware of this tactic to take steps to maximize their results.

• Diagnostic: Certain manufacturers (General Motors, BMWNA, FCA-Stellantis, Porsche of NA, Volkswagen of America) include all diagnostic charges, including those for which the customer declines the repair. As a result, it is critical to bill all diagnostic lines at your retail door. Discounting this line would have a negative impact on your average rate.

Parts Submissions

While annual parts submissions are not common, multiple submissions are starting to become more frequent. We have a number of dealerships (various franchises) that have submitted for warranty parts increases more than once and now have approved warranty parts markups over 100% with some over 120%. Oftentimes, increasing your warranty parts markup from 75% to over 100% will increase gross profit by thousands of dollars a month. Dealers looking to achieve similar numbers should analyze and adjust their parts price matrices to build more profit into the most frequent mechanical repairs. We have an interactive tool to help dealers do that.

• Toyota and Mercedes-Benz: After years of push back and reluctance from Toyota Motor Sales (TMS) and Mercedes-Benz of USA (MBUSA), we have successfully assisted several Massachusetts Toyota dealers obtain retail rates for warranty parts. Additionally, we have assisted Mer- cedes-Benz dealers in other states with similar laws to Massachusetts.

• Buy/Sell Transactions: Additionally, it is important to note that most manufacturers reset the warranty parts rate to 40% or MSRP after a buy/sell. This requires the new dealer to submit for a warranty parts rate increase to retail. Certain manufacturers will claim that a submission cannot be made in the first year, but that is simply not true. A warranty reimbursement submission (parts or labor) can be submitted under Chapter 93B any time after the closing date. However, the dealership will need to accumulate enough data to submit 100 qualifying repair orders (usually within 60 days).

If you have any questions regarding these issues or any other issues pertaining to the warranty reimbursement process, please contact Frank O’Brien, CPA, CIA, CFE at (339) 255-5358 or frank.obrien@ withum.com.