We have heard from numerous dealers that manufacturers have been reducing part prices related to specific repairs, or changing part numbers. While a manufacturer may have legitimate reasons for doing this, it is also a tactic typically employed by manufacturers to reduce the amount of compensation paid to dealers for warranty or recall services when they anticipate a large volume of a particular type of repair.
The reduction in parts price can have a tremendously negative impact on the amount of reimbursement a dealer receives for warranty or recall work. Almost all states now require that dealers be reimbursed at the equivalent of their retail parts markup and labor rates for warranty work. Likewise, many states require that dealers be reimbursed at the equivalent of their retail parts markup and labor rates for recall work. If a part has historically been priced at, for example, $100 and the dealership’s warranty parts markup (based upon retail rates) is 75% then the dealer is reimbursed $175 for the use of that part in a warranty or, where applicable, a recall repair. However, if the parts price is reduced to $10 then the dealer is reimbursed only $17.50 for that same repair. After subtracting out the cost of the part to the dealer, the difference in reimbursement is $57.50 every time that part is used in a repair.
The practice of artificially suppressing the price of a part may violate state law, as many states regulate whether a manufacturer can manipulate part numbers or the price at which dealers purchase specific parts.
Under various state laws, manufacturers are flat-out prohibited from changing part numbers, implementing special parts numbers, or changing part prices for parts used in warranty repairs, predelivery services, recalls and similar services if it results in lower compensation to dealers.
Some states take other approaches, such as allowing price changes, but requiring the manufacturer to lower the dealer cost of the part by the same percentage. Whatever the approach, many states have laws in place to either prohibit or curtail this practice.
Some manufacturers have gone so far as to eliminate any cost of the price whatsoever and have informed the service department that the part will be delivered at no charge in exchange for the dealership agreeing to receive a flat fee of, say, $25.00 as a handling fee. The manufacturers likely would plan to argue that the agreement is a legally binding one with the dealership which supersedes any franchise law protection.
Dealers should be sure that their service and parts department personnel are aware of the OEM tactics related to reducing or eliminating the cost of parts and make you aware of any abrupt changes to parts prices. Service and parts department personnel should be instructed to never sign or acknowledge any agreement with the OEM related to a parts price change without executive management approval.
If you have been negatively impacted by a manufacturer changing part prices or manipulating part numbers to lower the price, particularly in relation to high volume repairs or in anticipation of a recall, you should contact an experienced dealer lawyer to determine and preserve your rights.