Warranty Labor Rate Increase

Manufacturers are required to reimburse a dealership for warranty repairs at the average hourly rate charged to their retail customers. The calculations are relatively straight-forward but do require some thought before proceeding and the results vary between the OEMs. Knowing the manufacturer, state, and being able to relieve the service manager list of “To Do’s” is the main reason many dealers choose SDS.

Most manufacturer’s will also require a survey of the surrounding same make franchises before approving the increase. In other words, if the market only calls for a $85.00 an hour labor rate and a dealer tries to go to $95.00 an hour, it probably will meet some resistance. Having said this, we find that in any given market there is plenty of room for improvement.

Effective Labor Rate is a term used when calculating the actual retail rate that is being charged to the customer. This would include: LOFs, tire rotations, maintenance services, tires, etc. which lower the door rate. Depending on the state and/or manufacturer, maintenance items may be excluded. Our belief is that the customer pay effective labor rate should never be less than 85% of the door rate (including LOFs, specials, etc.).

Stores typically fall between 90 and 95% of the door rate once the specific exclusions are taken when submitting a labor package. Like parts, it is effected greatly by service desk discounts and how well the dealership holds the effective rate.

Matrix, Grid or Flex pricing is also used when selling labor hours. SDS can provide you with a file wherein you control the strength of the pricing. It is quickly becoming an industry standard which is a constant method for charging customers rather than a subjective advisor increasing/decreasing the rate for various kinds of work.

Main Factors That Reduce the Effective Labor Rate and the Gross:

  • The 3 Corner Check of the Repair Order – Is a must in every dealership. Someone other than the service department should be verifying that the customer is being charged the correct dollar amount for the hours billed and that the technician is being paid the correct time for each repair. For instance, if the time charged is 1 hour, the customer should be billed the shop’s labor rate of $85.00 an hour and the technician should be paid 1 hour. Paying the technician more than charged reduces the effective rate and gross profit margin. If payment is needed, create another line and bill the additional time internally to shop policy.
  • Discounts given without an explanation or no process in place for monitoring and controlling discounts. Likes new car sales people, service advisors like to sell at wholesale rates too.
  • Discounts not properly documented – Many time XX dollars are given on a repair order for a maintenance item or coupon. This discounts must be written to the specific condition(s) that it applies to.

How do we get started?

At no cost to the dealership, contact one of the SDS consultants. We will determine how much of an opportunity there is and all the information provided is kept confidential and destroyed once the package is approved. Please have the following information available so we can determine both the lift and pricing for your store size.

  • Customer Pay Labor Sales in Dollars
  • Customer Pay Labor Hours
  • Warranty Labor Sales in Dollars
  • Warranty Labor Hours
  • Retail (Door) Labor Rate
  • Current Warranty Labor Rate
  • Straight Labor Rate or Matrix?

Once we receive this information we can provide both a low and high end estimated lift and pricing.