Extended contract sales now can mean future shop profits

The growth in sales of vehicle service contracts in recent years means more work — and more income — for dealerships’ fixed operations.

But it also requires service departments to pay attention to the often complicated features of extended service plans. Among other things, dealerships sometimes must bet that payment rates for maintenance and repairs spelled out in the contracts won’t be less than the actual rates when work is done years later.

The share of new-vehicle buyers who purchased a service contract rose to 44 percent in 2016 from 38 percent in 2010, according to the National Automobile Dealers Association. NADA says it expects the rate to rise this year.

In the same period, the volume of work performed under service contracts increased even more sharply, to more than 15 million repair orders from fewer than 5 million, NADA says.

That growth, in part, represents the greater variety and breadth of extended service plans available to consumers, according to industry analysts. Surging U.S. new-vehicle sales during that period also played a role.

When a dealership sells a service contract, it typically earns a commission from the F&I product vendor. But it doesn’t collect service revenue on cars and trucks with extended plans until the vehicles are no longer covered by factory warranties.

Service contracts sold by FCA’s Mopar Vehicle Protection program are treated like the automaker warranty in setting parts and labor rates, says Paul Hrnchar, vice president of Hrnchar Automotive Group in North Olmsted, Ohio.

The only variable, he adds, is the amount of the buyer’s deductible.

Follow the money

Management of service contracts has grown more efficient, says Jim Roche, senior vice president of marketing and managed services for Xtime, a subsidiary of Cox Automotive.

“Administration of these things is now a standard practice, very straightforward,” Roche says.

A new-vehicle owner can buy a service plan after the initial car or truck purchase, even after the factory warranty expires. But it’s easier to tailor coverage when a vehicle is new, says Mark Bardusch, general manager of Ford Motor Co.’s Extended Service Business.

Dan Hutko, U.S. operations manager for the extended service programs operated by the Ford and Lincoln brands, says he has seen “a steady growth in interest” in service contracts among car buyers.

“Forty percent of customers purchase a plan,” he says.