Guest commentary: Warranty reimbursement can provide financial lift to dealerships

Between ongoing talent shortages, inflation concerns and vehicle affordability worries, operating a dealership has arguably never been more challenging — and it doesn't seem to be getting any easier anytime soon.

Although dealers have made record profits in the last couple of years, getting back to the brass tacks of controlling expenses and maximizing profitability is a must in our current market. One strategy that dealers may overlook but that can be a significant revenue stream is labor and parts warranty reimbursement at retail.

Our internal research reveals the average dealer can add $100,000 to $200,000 in annual gross profit when reimbursed at its client repair rate for warranty repairs. Why isn't every dealer jumping on this bandwagon? That's where things get complicated.

Nearly all states have legislation entitling dealers to be reimbursed at retail, but state statutes often are couched in the kind of legalese that make them nearly impenetrable to anyone who isn't in the legal field. Also, the burden is put on the dealer to pursue entitled increases. With limited internal resources, undertaking this herculean task means taking the eye off the ball of other equally important operational needs.

Finally, it's no secret automakers will do whatever possible to keep their warranty costs in check. To this end, they've created protocols and preferences that seem to change on a dime. Factory auditors also are all too ready to jump at the chance to rebut or deny submissions.

The list of automaker practices that are less than favorable to the dealer when it comes to reimbursement is long. Some employ threshold increases, others skew the interpretation of state statutes, and still others respond to submissions with multi-page, highly detailed letters that choke out any motivation to proceed.

Recently, one particular import manufacturer scrutinized every request for increase that was a certain percentage over the current rate, while accepting every request under that percentage. When challenged, the manufacturer stated dealers should only be entitled to that arbitrary percentage and not warranty reimbursement at retail — a flagrant disregard for state laws.

There are hundreds of thousands of dollars at stake — even millions for large dealer groups. Warranty work comprises a significant portion of most franchised dealership service departments' repair orders.

When dealers are paid fair retail rates for that work, the revenue stream can help lift their vitally important service centers and even combat talent shortages. The need for technicians is substantial, if not dire. Paying a premium to attract new hires and retain current employees could certainly be supported by automakers respecting the warranty reimbursement at retail laws that are in place.

Ultimately, there's too much money on the line for dealerships to roll over and play dead. That's why the trend today is for dealerships to turn to warranty reimbursement vendors to do the heavy lifting. Vendors shoulder the work of pulling potentially thousands of repair orders and preparing the submissions. The time savings and expertise a third party brings to the table are worth it to secure all the money a dealership is owed. This is especially true for dealerships with stores spread across multiple states because statutes and automaker specifications vary state by state.

However, conduct a thorough study of your vendors to ensure you are not leaving money on the table. It's imperative to carefully vet vendors before hiring. Focus on years of experience, percentage of retail repayments, expertise with legal statutes, familiarity with auto manufacturers and an aggressive approach to eligibility timelines provided by state statutes.

With so much money at stake, vendor audits cannot be overlooked. An audit will reveal if vendors are reaching full reimbursement potential and pinpoint areas of improvement. This strategy could result in significantly higher payments.

For example, one of the largest independent dealer groups in the country recently underwent a vendor audit that revealed more than $14 million left on the table every year. This was in addition to the millions of dollars in retail repayments successfully won by that vendor.

The battle over factory reimbursements for warranty work has been raging for nearly as long as there have been franchised auto dealers. Yet, state laws protect retail pay for warranty work. Dealerships, with the help of an experienced vendor, would be wise to tap into this revenue stream and add the profits that legally belong to them back to their bottom lines.