By Patrick Hutchinson
Starting October 1, 2018, thanks to Senate Bill 18-219, Colorado Motor Vehicle Dealers will be able to charge manufacturers retail labor and parts rates on warranty work. This will likely mean a substantial increase in profitability for most automobile dealers. Here are the steps you need to take to ensure your dealership takes advantage of this legislation:
Step 1- Prepare Your Documents. The law sets two different ways to calculate your retail labor rate and retail parts markup percentage. First, you can submit 50 sequential repair orders from the prior 60 days. So if you plan to submit your proposed labor rate to the manufacturer on October 1, 2018, you can use any 50 sequential repair orders from August 1, 2018, until October 1, 2018. Second, you can submit all of your repair orders for a 30-day consecutive period. What you should also know about this step is that to calculate the Retail Labor Rate and the Retail Parts Markup Percentage, you do not have to submit the same repair orders. Finally, know that any repair orders that have non-retail work, either partially or entirely will not factor into the calculations. Additionally, the calculation will also not include work done for: wholesale, reconditioning, specials, express services, promotional discounts, goodwill/policy, routine maintenance (fluids, filters, batteries, nuts, bolts, fasteners and belts), parts without individual numbers, tires, window tint, emissions testing, safety inspections required by law, fleet or volume discounts, or repairs on vehicles owned by the dealer and employee or affiliate.
Step 2- Know the Calculation.
- Retail Labor Rate = Total Non- Warranty Labor Sales / Total Non-Warranty Labor Hours.
- Retail Parts Markup Percentage = (Total Parts Sales from Non-Warranty Repairs/ Dealers Total Cost for those Parts) – 1 X 100
Step 3- Submit the Rates to Manufacturer. Submit your rate calculations and repair orders to the manufacturer in writing. They have 15 days to contest the calculations. If they do not, then your new rates will become active. If they do, the manufacturer must provide you with a detailed explanation of the reasons they believe the calculations are materially inaccurate with evidence and propose their own rates.
Step 4- After 6 Months, Re-evaluate. The new law allows dealers to submit increased rates to the manufacturer semi-annually.
If for any reason the manufacturer does not agree with the new rates, there are several protections built into the law for dealers, including:
- Burden of Proof. If the dealer and manufacturer are not able to agree on rates and they are forced to go to court, the manufacturer bears the burden of proving by a preponderance of the evidence that the dealers proposed rates are materially inaccurate.
- Retroactive. During the legal proceeding the dealer can only charge the previous rates, but after the rates are established through judicial proceedings the rates will be applied retroactively to the date 15 days after the original submission.
- The prevailing party in court shall be eligible to be awarded reasonable attorney fees and costs.
- If the court finds that the manufacturer acted in bad faith or in order to delay paying the increased rates, the court may award two times actual damages.
Other Protections Provided:
- The manufacturer shall not pay less than the hourly rate it was paying for any warranty prior to the law.
- The manufacturer shall not eliminate flat-rate times or establish unreasonable flat-rate times as compared to the nationally published flat-rate guide.
- The manufacturer shall set flat-rate labor times for new line-makes that are consistent with existing rates.
- If the manufacturer provides parts at no cost to the dealers, the dealer shall still be compensated the amount of the retail parts markup percentage using the dealer’s cost for that part in the manufacturer’s price schedule.
- The manufacturer is prevented from reducing the suggested or list price for any part primarily for the purposes of providing lower compensation.
- The manufacturer cannot create a different part number for a warranty repair versus a non-warranty repair.
- The manufacturer is prevented from assessing a penalty, surcharge or any other method of trying to recover its costs from the dealer due to the increase.
If you have any other questions or would like to discuss this legislation in more depth, please feel free to contact us.
Patrick Hutchinson is the Founder and General Counsel for Dealer Legal Services, a law firm focused on partnering with dealers to help them protect and grow their business.