Optimize your revenue from reimbursed service work
By the team at Truist Dealer Services, with special contribution from Jason Allen, a shareholder at Bass Sox Mercer, Attorneys at Law.
Dealerships often depend on healthy margins from service departments to provide a consistent, reliable source of revenue. With 20-40% of total service hours dedicated to warranty and related work, optimizing the pricing and processing of your warranty reimbursements can have an outsized impact on your profits and dealership growth.
Work that only dealers can do
Today’s cars are more dependable, often with fewer issues or failures that require warranty repairs. Yet they provide more opportunities for OEM-reimbursed service work including:
- Model recalls. Recalls apply to specified models of all ages, including vehicles that are beyond the warranty period. The National Highway Traffic Safety Administration (NHTSA) dictates recalls at the federal level and tracks repairs via a nationwide system. Each new recall triggers a wave of reimbursable service work on affected models.
- Manufacturer maintenance provided as part of the new or certified pre-owned vehicle. Some manufacturers provide prescribed maintenance as part of a new/certified used car sale. This reimbursable maintenance work generates reliable revenue (and a valuable ongoing connection to the customer) for the dealers who get it.
- Extended warranties. For new and many used vehicles, buyers can purchase extended warranty plans that set up additional reimbursable warranty work. Non-OEM warranties issued by third parties offer the potential for additional work, with reimbursement dictated by the terms of the contract.
Each of these scenarios opens the door to more revenue through reimbursements and more engagement with buyers. As the only source of manufacturer-certified technicians to fulfill warranty and recall work, dealers have an opportunity to strengthen relationships with current customers and build new ones with potential owners. Warranty work can secure ongoing service and parts revenue while keeping the dealer top of mind when it’s time to trade in and buy again.
The mechanics of warranty reimbursement
Reimbursed service work provides a steady source of low-risk revenue. With the right measures, it can do so much more. Dealers who take the time to dig into the details of warranty reimbursement, revamp their workflow tracking and documentation to optimize warranty payments, and follow OEM program requirements to maximize rates and reimbursements can see real returns on their efforts toward higher service revenues.
Maximizing warranty reimbursements depends on state laws, which dictate how retail rates for labor and parts are determined. Most states require that manufacturers reimburse dealers for warranty work at the actual rates their retail customers pay for parts and labor. Those laws do change from time to time, requiring dealers to keep up with the latest legislation and adjust their programs accordingly.
There are subtle but meaningful details that determine the labor time standards used, the method for calculating retail rates, and how retail parts costs are set. While state laws dictate that OEMs pay retail rates, the onus is usually on the dealer to document and prove the rate they are charging retail customers. For example, proof might require the dealer to submit a sample of 100 recent service orders to determine the retail reimbursement rate. The manufacturer is then required to use the average price charged across the sample to calculate the dealer’s reimbursement.
In the zero-sum match between dealers looking to maximize reimbursement and OEMs looking to control them, watch out for OEM offers that circumvent state-mandated legal protections. For example, offers by your OEM to provide needed warranty parts at no (or reduced) cost may allow them to circumvent legal protections to reimburse you for parts at retail.
6 best practices to maximize warranty reimbursements
Follow these practical steps to help you get the most in warranty reimbursements.
- Make sure your reimbursement rate matches what you are currently charging the retail customer.
Costs for labor, parts, and equipment to service vehicles have risen sharply over the past few years. Service work is becoming more sophisticated as well, with newer cars demanding specialized equipment and specialized technicians that command higher wages. If the rates you are reimbursed by the OEM rely on older data that hasn’t been updated to reflect the current financial realities, you may be losing out on revenue.
- Price service work consistently and with discipline.
Applying discounts may seem like an effective way to build relationships and loyalty, but the goodwill you create for one customer may have an unintended impact on your warranty reimbursement rates overall. Customers paying a “friends and family” rate or receiving a reduced bill on repair work could lower the average rate for your service work sample, potentially lowering the allowed reimbursement rate for all your warranty work. Consistently charging your published rate is one of the most important things you can do to maximize your reimbursement rate.
- Maintain excellent service records.
Pricing data drives reimbursement rates, so careless record-keeping can have an outsized effect on potential revenue. Be sure your records accurately reflect the customer’s concern and include a detailed description of work performed. Pay careful attention to how you categorize service engagements—misclassified work on one job (in particular in the service work sample), and inaccurate data can affect the reimbursement rates on all your warranty work.
Set up your service workflow computer system so you can easily generate reporting to update the retail rates you charge as often as allowed by your OEM and state statutes.
- Hire the right service manager.
Hire a service manager who understands warranty reimbursement complexities and its impact on dealership profitability. Choose someone eager to learn state statutes and OEM reimbursement programs to maximize service revenue and improve service absorption rates.
- Revisit your reimbursement rate often.
Most states require that manufacturers allow dealers to make annual pricing adjustments for warranty reimbursements. While the process can be time-consuming, it’s well worth the time and effort to update your pricing—as often as the law permits. A small adjustment can deliver huge benefits because this type of work is such a large part of total service volume.
Even if you don’t make a new reimbursement request each year, you should evaluate what you’re charging customers (and paying for labor) on an annual basis. Make sure that the rate you’re getting from the manufacturer is in line with what the market supports and what the work is costing you. You’re paying a lot more for skilled technicians today than you were just three or four years ago, so your reimbursement rate should reflect those increased expenses.
- Beware of manufacturer CPI programs.
OEM-offered, CPI-based multi-year programs may seem like an easy way for dealers to secure annual rate increases. However, CPI programs are based on changes to the national CPI—not the amounts you charge customers—and typically come with a cap less than 5%. In exchange for the convenience of not requesting an increase in your retail rate, you’re almost certainly accepting lower yearly increases than the law entitles you to receive.
Get the most benefit from your warranty servicing work.
The Truist Dealer Services team engages with auto retailers nationwide every day. Understanding your challenges allows us to provide solutions that drive profitability and help increase your dealership’s value. Contact your Truist relationship advisor to see how Truist can help your business advance.
Special thanks to Jason Allen, Shareholder at Bass Sox Mercer, attorneys at law. Bass Sox Mercer is a dealer franchise law firm, representing automobile, truck and motorcycle dealers in complex commercial transactions, business and franchise disputes, operational issues and litigation and specializes in dealer rights relating to warranty reimbursement.
Contact Mr. Allen at jallen@bsm-law.com or 850.878.6404.