Staying ahead of OEM warranty reimbursement changes.

As OEMs take steps to reduce service costs, it’s incumbent upon dealers to keep up with OEM cost reduction strategies and advocate strongly for their rights. The best practices outlined above are your baseline. Consider these three additional steps to maximize your reimbursements and receive the service margins your business deserves:

Some OEMs have adopted a process for “exchange parts” whereby the OEM ships warranty or recall parts directly to the dealer at no or reduced cost, often prohibiting the dealer from directly ordering those parts. The dealer typically receives a nominal handling fee and then returns the defective part to the manufacturer.

This approach may appear attractive at first because your service department doesn’t need to stock the part. However, a closer look at OEM exchange-parts policies reveals meaningful drawbacks affecting both your customer’s experience and your profitability.

Since the parts are never stocked, part ordering and shipping add to repair completion time. Extended turnaround times defeat dealers’ efforts to develop long-term service relationships with a superior customer experience for their warranty and recall work.

Exchange parts can also shrink dealer service margins because dealers don’t receive their normal markup on those parts. In addition, since exchange programs often target higher value electronic parts—radios, infotainment systems, and EV batteries—the impact on the dealer’s bottom line can be substantial. Not recognizing the impact of this practice can result in a missed opportunity for income at each of your service locations.

Many state laws require the manufacturer to provide warranty reimbursement for parts at their listed price, even if dealers receive the part at no or lower cost under the exchange parts process. Dealers in these states get the warranty compensation they’re entitled to receive.

Best practice: Determine whether the OEM provides exchange parts for warranty or recall repairs at no cost or at a discounted rate. Consider your options to reduce or eliminate acceptance of reduced reimbursement for exchange parts.

Virtually every state requires manufacturers to reimburse dealers for labor at the retail rate customers are charged. However, the OEM still controls the amount of time for which they pay that retail rate. For customer-pay work, dealers typically use industry standard third-party time guides instead of the OEM’s time guides.

This creates a discrepancy between customer and OEM-reimbursed service work. Even if the hourly rate is the same, the OEM is not paying the same market rate for a warranty repair as the customer, because the time the OEM allows is usually less.

Historically, the labor reimbursement laws have required “reasonable” compensation, so OEMs push that definition by requiring dealers to mount a defense as to why their time guide is not reasonable. Many states have recently addressed this issue by passing laws that eliminate this discrepancy and require OEMs to pay reimbursement by following the same time-guide used for customer-pay work. 

Best practice: Dealers in states that have enacted these laws should consider exercising their right to be reimbursed using the same time guides used for retail work. Demand that OEMs use your customer pay-guide, and if they won’t, consider actions that will force them to use the legally allowed time guide.

If the manufacturer isn’t compensating you fairly for warranty work performed, the solution starts with meticulous documentation. Good records allow you to track the delta between the compensation you receive from the manufacturer and what you would receive by billing at retail rates. If the delta is substantial, consider negotiating with the OEM to resolve your shortfall.

OEMs often reject proposed warranty rates and customer-pay labor time guides submitted by dealers. They may also suggest a reduction rather than responding with an outright refusal.

Dealer options vary by state, but many states and many manufacturers have an informal information-sharing process to bridge the gap that can avoid a rush to the courthouse. Many dealers begin by following the manufacturer’s dispute resolution process.

Best practice: Maintain precise records and calculate the difference between your retail compensation and OEM reimbursement compensation to justify the reimbursement that you are entitled to receive. Consider de-escalatory approaches to resolve payment disagreements.

If less combative strategies don’t yield a satisfactory response, you may consider legal action—alone or as part of a class action. Dealers have valid reasons to be apprehensive about taking an adverse legal position against their OEM. However, many state warranty laws and manufacturer policies provide an informal method to resolve these disputes without dealers having to initiate full-blown legal proceedings.

It takes money and effort to get the results you need, but a change in pricing means more profit, not just immediately, but in perpetuity. OEMs looking at margin preservation are similarly motivated to push back. With good-faith negotiations and clear communication, you can work toward a warranty reimbursement policy that is agreeable for both parties. 

Best practice: Consult with an attorney, then decide how much time and expense you are willing to invest in changing the warranty compensation agreement going forward. Lower-cost steps such as sending a letter from your attorney or using an informal dispute resolution process can be effective with court action being a backstop if those are not successful.