Fixed Ops Journal - December 2017 - 43

FIXED OPS JOURNAL

EXTENDED SERVICE

 Contract sales now can mean future shop profits ---- but mind the details

JENNY KING

foj@autonews.com

he growth in sales of vehicle service
contracts in recent years means
more work - and more income - for
dealerships' fixed operations.
But it also requires service departments to
pay attention to the often complicated features of extended service plans.
Among other things, dealerships sometimes must bet that payment rates for maintenance and repairs spelled out in the contracts
won't be less than the actual rates when work
is done years later.
The share of new-vehicle buyers who purchased a service contract rose to 44 percent in
2016 from 38 percent in 2010, according to the
National Automobile Dealers Association.
NADA says it expects the rate to rise this year.
In the same period, the volume of work performed under service contracts increased
even more sharply, to more than 15 million
repair orders from fewer than 5 million,
NADA says.
That growth, in part, represents the greater
variety and breadth of extended service plans
available to consumers, according to industry
analysts. Surging U.S. new-vehicle sales
during that period also played a role.
When a dealership sells a service contract, it
typically earns a commission from the F&I
product vendor. But it doesn't collect service
revenue on cars and trucks with extended
plans until the vehicles are no longer covered
by factory warranties.
The payment rate for future work often is set
when a service contract is sold, says Elgie
Bright, chairman of the automotive marketing and management department at Northwood University in Midland, Mich.
"It may not be the door rate when repairs
are needed later on," Bright told Fixed Ops
Journal. And dealership body shops may have
their own rate sets, he says.

Plans differ
The extended service plans of automakers
such as BMW and Fiat Chrysler Automobiles
reimburse dealerships for factory parts and
retail labor rates in effect when claims are
made.
BMW of North America's extended program

Ford Motor Co. says 40 percent of its new-vehicle buyers purchase extended service plans.

Orders of magnitude

The number of dealership repair orders
for work performed under extended
service plans has grown substantially.
NO. OF ORDERS

2016
2010

15,406,997
4,684,794

Source: National Automobile Dealers Association

builds on the luxury automaker's factory warranty, says spokesman Hector Arellano-Belloc. Repairs under these service plans do not
require preapproval, he adds.
BMW has made extended service plans
available for older and higher-mileage vehicles in recent years, Arellano-Belloc says.
Service contracts sold by FCA's Mopar Vehicle Protection program are treated like the
automaker warranty in setting parts and labor
rates, says Paul Hrnchar, vice president of
Hrnchar Automotive Group in North Olmsted, Ohio.

The only variable, he adds, is the amount of
the buyer's deductible.

Follow the money
Management of service contracts has grown
more efficient, says Jim Roche, senior vice
president of marketing and managed services
for Xtime, a subsidiary of Cox Automotive.
"Administration of these things is now a
standard practice, very straightforward,"
Roche says.
A new-vehicle owner can buy a service plan
after the initial car or truck purchase, even after the factory warranty expires. But it's easier
to tailor coverage when a vehicle is new, says
Mark Bardusch, general manager of Ford Motor Co.'s Extended Service Business.
Dan Hutko, U.S. operations manager for the
extended service programs operated by the
Ford and Lincoln brands, says he has seen "a
steady growth in interest" in service contracts
among car buyers.
"Forty percent of customers purchase a
plan," he says. 

DECEMBER 2017

PAGE 43

Table of Contents for the Digital Edition of Fixed Ops Journal - December 2017