BMW Lowers Warranty Reimbursement

BMW has, or soon will, revise its policy for warranty reimbursement, including both labor and parts reimbursement. With respect to labor, BMW currently pays on the basis of 8 Flat Rate Units ("FRUs") per hour. The new FRU will be 10 per hour. Therefore, a repair that books for 10 FRU's will be paid for 75 minutes under the old system, but only for 60 minutes under the new system. This affects not only the dealership but also negatively impacts technician pay.

On the parts side, BMW is/will be paying only 30% above cost for parts used in warranty repairs – significantly lower than the retail price for those parts.

The relevant section of New York's Franchised Motor Vehicle Dealer Act provides as follows:

§ 465. Procedures relating to warranties. 1. Every franchisor shall properly fulfill any warranty agreement and/or franchisor's service contract and shall compensate each of its franchised motor vehicle dealers for warranty parts and labor in amounts which reflect fair and reasonable compensation for such work...For parts...and labor reimbursement, fair and reasonable compensation shall not be less than the price and rate charged by the franchised motor vehicle dealers in the community or marketing area for like services to non-warranty and/or non-service contract customers, provided such price and rate are reasonable.

The Dealer Act requires factories to give dealers "fair and reasonable compensation" for warranty work. "Fair and reasonable compensation" is further defined as the price or rate charged by the dealers in the same community for the same services provided to non-warranty customers. In short, BMW must pay its dealers for warranty work at the going local retail rate for labor and the going local retail price for parts.

Effective January 1, 2009, this provision of the Dealer Act will be amended to provide a more specific mechanism for determining fair and reasonable compensation for warranty parts and labor:

For purposes of this section, the price and rate charged by the franchised motor vehicle dealer for parts may be established by submitting to the franchisor one hundred sequential nonwarranty customer-paid service repair orders or the number of sequential nonwarranty customer-paid service repair orders written within a ninety day period, whichever is less, covering repairs made no more than one hundred eighty days before the submission, and declaring the price and rate, including average markup for the franchised motor vehicle dealer as its reimbursement rate. The reimbursement rate so declared shall go into effect thirty days following the declaration and shall be presumed to be fair and reasonable, however a franchisor may rebut such presumption by showing that such rate so established is unfair and unreasonable in light of the practices of all other franchised motor vehicle dealers in the vicinity offering the same line make. The franchised motor vehicle dealer shall not request a change in the reimbursement rate more often than twice in each calendar year. In establishing the labor reimbursement rate, the franchisor shall not require a franchised motor vehicle dealer to establish said rate by a methodology, or by requiring information, that is unduly burdensome or time consuming to provide, including, but not limited to, a transaction by transaction calculation.

Thus, starting January 1, 2009, dealers can establish their own warranty labor rates and parts prices by submitting a given number of nonwarranty customer-paid service repair orders and declaring the price and rate and average markup. Rates and prices established by the dealer in the this manner are presumed to be “fair and reasonable” however the factory can attempt to rebut by showing such rates and prices are unfair compared to the practices of other dealers of the same line make in the area. Dealers can use this process no more than twice per year to “self-change” their prices and rates.

In short, New York’s current statute provides significant protections for the dealers – dealers must be paid fair and reasonable compensation for warranty work and such compensation is pegged to the prices and rates changed by dealers in the same area or market. The amendments to the Dealer Act taking effect in January 2009 give dealers another tool that effectively allows them to set their own reimbursement rates and policies by submitting nonwarranty customer-paid service repair orders and declaring their rate, prices and markup.