AB-179 Warranty Reimbursement: Now Is the Time To Revisit

The California AB-179 was signed into law over three and a half years ago; however, not all dealers have taken full advantage of the law.

Specifically, the law permits dealers to submit for warranty parts and labor rate increases once per calendar year; however, some dealers have not submitted for a warranty increase since its initial submission while others have only resubmitted once. We have assisted over 2,000 dealers with warranty parts and labor submissions with approximately 20% of those for California dealers. Based on our experience, the financial impact for California dealers on average is much higher than dealers in other parts of the country with dealers increasing gross profit by tens of thousands of dollars a month. Failing to submit annually causes dealers to lose out on incremental gross profit that cannot be recuperated since the financial impact is prospective not retroactive. Therefore, now is the time for dealers to revisit their warranty reimbursement submissions. For those dealers that have had multiple submissions since the enactment of AB-179, management should focus on submitting for labor rate and parts markup increases annually to maximize gross profit.

Despite the ability to submit for a labor increase once per calendar year, the average dealer waits 18 months to two years between submissions, sometimes longer. Service directors should be increasing their retail door rates annually and tweaking their labor grids at the same time. The dollar value of each year’s increase should be calculated based on the year-over-year increases in technicians’ pay rates, other personnel costs, operating expenses and overhead on a cost-per-labor hour basis.

Certain manufacturers, for example, 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 AB-179 or other state franchise laws. More importantly, the manufacturer locks the dealer into the program for a period of time (usually three years). Management should prepare an analysis to project the average retail labor rate prior to executing any rate index 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 programs give the manufacturers cart blanche authority to lower the rate as they deem appropriate. It is common for the dealer’s final approved rate to be significantly lower 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.

Manufacturers have always calculated the average rates net of discounts so dealers should make all efforts to minimize discounts. However, we are starting to see certain manufacturers such as General Motors (GM), BMWNA, Audi of America (Audi), Porsche of North America (Porsche) separating labor and parts discounts in their calculations. This could be problematic for those dealerships that take a 70/30or 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.

AB-179 includes a maintenance exclusion in the law and provides several items that constitute maintenance. Certain manufacturers (e.g., Ford, BWWNA, FCA-Stellantis, Subaru of America, Porsche, Mazda North America and Volvo Cars of North America) have taken a rather liberal interpretation of the maintenance exclusion and require dealers to include items such as brakes, wiper blades, keys and coolant flushes. These items are often discounted, which will reduce the rate. Additionally, Audi requires dealers to include alignments performed in conjunction with a repair despite an alignment exclusion in the law. Management of these franchises should ensure that these services are competitively priced but not overly discounted and the hours paid to the technicians are in line with industry benchmarks.

BMWNA is notorious for including extended warranty repairs in the submission despite repairs for service contract providers being explicitly excluded in AB-179. In order to avoid these repairs from negatively impacting your rates, management 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.

Certain manufacturers (GM, BMWNA, FCA-Stellantis, Porsche, 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 rate. Discounting this line will have a negative impact on your average rate.

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%. With the volume performed in the service departments for dealers in California, increasing your warranty parts markup 10% could increase gross profit by thousands of dollars a month. Dealers should analyze their parts price matrices and adjust pricing to build more profit into the most frequent mechanical repairs. We have an interactive part matrix analysis tool to help dealers maximize parts mark-up rates.

After years of push back and reluctance from Toyota Motor Sales (TMS) and Mercedes-Benz of USA (MBUSA), we have successfully assisted several Toyota and Mercedes-Benz dealers obtain retail rates for warranty parts.

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 through AB-179 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).