As the water well industry continues to evolve, contract drilling for other companies can generate additional revenue.
By Mike Price
Many water well contractors are well-versed in contract drilling for other companies, but as the industry continues to change, more opportunities will undoubtedly present themselves in 2022 and beyond.
It’s important then for all contractors to make sure they’re prepared for this line of subcontract work. Naturally, since contract drilling is intended to generate additional revenue, a company first needs to know its appropriate pricing before deciding to submit a bid.
“When drilling for other contractors, one thing you got to keep in mind is that they are also trying to make money on your services, so don’t cut yourself short when it comes to trying to price a job just because they’re saying, ‘Hey, I’m trying to make money on my end,’” says Hunter Winkleman, vice president of Putnam Well Drilling Inc. in Welaka, Florida.
“After that point you’re the subcontractor. They are facilitating the job and you are having to complete the labor side of it. Just because they’ve secured the job and you’re doing the work doesn’t necessarily mean you need to cut corners on your prices just to try and get the job.”
Contract drilling makes up 10% of Putnam Well Drilling’s annual workload. The company drills for Florida contractors who don’t drill wells, or for contractors who only drill residential wells (4-inch being largest in the area). Putnam Well Drilling has the equipment to also handle agricultural, municipal, or commercial (8-, 10-, 12-, and 14-inch wells).
In this line of work with multiple companies involved, Winkleman can’t stress enough avoiding additional work requests once a contract has been signed and thoroughly discussing the job with everyone involved. He likens drafting a contract to the way prices of food items are listed on a restaurant menu.
“When you go to a restaurant, a menu has a very clear labeled objective as to what is going to happen when you order this product and also has a price at the end of it,” he says. “You really can’t have enough paperwork in place to protect yourself as a company when you’re the third-party provider of a product.”
Winkleman, whose grandfather started the company nearly 50 years ago and is run by his father today, recommends subcontractors adding a price margin cushion when determining one’s quote. This can help safeguard a company if the project doesn’t go as planned.
“If you build yourself a 10 to 15 percent buffer in there, it could really help save a lot of turmoil in the long run,” he explains, “because then the customer may make a mistake that you’re working for and say, ‘Hey, I forgot this is something that needs to be addressed.’
“And you say, ‘Good news for you, I can cover that at no additional expense’ because I’ve built that in, but you don’t have to disclose that. You can just say, ‘We can work with you on that, and it won’t be a detriment cost.’”
With the rising material costs (see shaded sidebar), Winkleman stresses the importance of paying attention to both inflation and labor costs when determining contract drilling pricing.
“It’s really hard to change the price of your market overnight,” he says, “so if you don’t pay attention to how much your cost of labor is increasing over a period of time, when it eventually hits you, it’s going to be very hard to try and sell your market at a 75 percent increase immediately as opposed to a slow build.
“If you take your time getting there, you’ll reach your goal at a lot better way and you’ll make money along the way. But you won’t scare the market so much to where they’ll say, ‘Hey, did you see so-and-so went up 75 percent on his total cost of an installation? What’s up with that?’ That’s what you would call a market scare and that can be a big detriment to a company if you do that all of a sudden at once.”
Winkleman said in 2021 that Putnam Well Drilling increased its prices the past two years that it determined the changes were safe for the company, its customers, and product overall.
“It’s worked out quite well,” he shares.
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In Jericho, Vermont, Jeff Williams, MGWC, CVCLD, discovered his company wasn’t charging enough nearly every time when contract drilling. Williams discovered this after taking community college classes in financial accounting, computerized accounting, payroll accounting, and managerial accounting in 2017 and 2018.
Upon looking at his company’s own financials and the number of “good contractor companies selling rigs in his area,” some of whom Williams drilled for, the 2016 president of the National Ground Water Association assessed the situation.
“For one reason or another a drilling rig didn’t fit into their business model,” says Williams, vice president of Spafford & Sons Water Wells and The Groundwater Foundation’s 2020 McEllhiney Lecturer. “It could be a lack of help, could be lack of revenue, could be market area, could be the way you price your services. It could be a number of things.
“So as these drilling rigs are going away, okay, here’s an opportunity to be able to go out and increase our revenue, but I also want to do this to increase our profitability. We can’t do this to just increase cashflow. We can’t do the work just to do the work. So how do I price it? How do I price a stand-alone rig when everything I’ve ever been doing is pricing how we do things based on gross volumes?”
The answer to that question, Williams says, doesn’t come by establishing one’s own benchmark prices based on what other area contractors charge.
“That’s just not the way you’re going to get profitability,” he insists. “To really quantify that takes a little work. You have to do the math.”
Further, Williams listed the following as the right reasons to diversify into contract drilling:
- Gain market share
- Become a more full-service company to increase customer satisfaction
- Most importantly, increase net revenue generation.
“If you’re diversifying out into other areas to save your business because you need to find areas that have better net revenue generation because you’re not making enough profit to survive, then you’re not pricing what you’re currently doing appropriately,” he says.
At the end of the day, Williams says a company needs to know its revenue targets each year when considering pricing. To reflect profit on his end, Williams increased the company’s prices (10% to 20%) in 2020.
Williams also monitors the consumer price index (CPI) to consider in his pricing. The United States inflation calculator showed an exceptionally low CPI average over the last 20 years (2.20%), with a 3.8% average the highest in 2008. For comparison, the previous 20-year average was 4.27%, with a high in 1980 of 13.5%.
“If you’re going to exist, you’re going to have to generate that revenue to replace that piece of equipment,” Williams says, “and I see a lot of Tier I through Tier III equipment out there. There’s a lot of Tier I equipment out there that’s getting pretty old and the jump to Tier IV is a pretty sizeable jump.
“If I’ve got a $100,000 piece of equipment and I’m running a $100,000 piece of equipment right now and I’m just barely making it, I’m not going to be able to go buy a $500,000 piece of equipment to jump into Tier IV because that’s about where it starts—$400,000 to $500,000 in my world.”
Williams again raised the company’s prices in 2021, thinking it is still substantially below what prices should be.
“We’ve got to still keep marching toward that,” he concludes. “Everybody is afraid that they’re going to lose a job if they don’t price it according to what they need to price it at. Everybody is willing to buy some work. You can buy a job anytime you want until you run out of money to buy jobs. And that’s what’s happening. You’ve got to cut out buying work.”
As a subcontractor, Winkleman offers some input to help move forward the relationships of all parties involved in a positive direction.
“You want to try to shed as much positive light towards the customer that the primary contractor would when he secured the job,” he recommends. “In doing so making sure you have clean and maintained equipment, making sure your employees have all the necessary background checks.
“When you’re a subcontractor, which is what we’re really talking about here, you are a guest in someone else’s home. You’re an alien on someone else’s jobsite. You’re invited, but at the same time you need to have the respectable manners of a guest because that’s simply what you are.
“You met the requirements, but while you’re there, you need to maintain a professionalism and work ethic and you need to make sure you have employees who meet the standard that the contractor would expect.”
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In southern Arizona, Nate Little, CWD, says contractors try to help one another out with contract drilling.
“Even competitors in our area helped us out in bids and got to jobs we couldn’t do and we do the same. We’re a pretty tight-knit group around here in Arizona,” says Little, vice president of Arizona Beeman Drilling LLC in Gold Canyon, Arizona. “Everybody knows everybody. It’s not real cutthroat. Everybody is out to do the same thing at the end of the day; we respect it.”
“If you’re diversifying out into other areas to save your business because you need to find areas that have better net revenue generation because you’re not making enough profit to survive, then you’re not pricing what you’re currently doing appropriately.”
Arizona Beeman Drilling, which does mostly large commercial flooded reverse work for municipal and power supply wells, drills 75% of the time for general contractors and 15% for pump contractors. The company has a lengthy backlog, choosing jobs that it knows will return a profit or if there is an existing relationship with the customer.
Little says the next three to five years look to be busy for contract drilling. The company went from running five rigs two years ago to trying to keep the third one running due to a worker shortage.
“Pump contractors are pulling pumps that are sanded up because they’re trying to get old wells rehabilitated and they’re having us either rehab the well or drill a new one,” he says. “We’re in a drought and it’s getting severe in the southwest, Nevada, California, Arizona, and New Mexico. We’re all fighting that drought. A lot of people are reaching out to get the well drilled.”
Showing respect and following good ethics (see shaded box above) are other considerations to follow.
Finally, when it comes to contract drilling, there are some unwritten rules. While all can’t be covered in this space, here are two to keep in mind.
“Your employees’ appearance, the type of employee you employ for a job,” Winkleman states. “You wouldn’t send your D team to go do an A-team job.
“That’s just something to really think about as well is what would the primary contractor expect of me in regard to how my employees are acting on the jobsite and are they acting accordingly to the standard at which they would be expected?”
Companies traditionally perform contract drilling with its own equipment, so no rented equipment is needed. However, if additional equipment needs rented, that cost would of course be figured in ahead of time in the cost of the quote.
Mike Price is the senior editor of Water Well Journal. In addition to his WWJ responsibilities, Price contributes to the Association’s scientific publications. He can be reached at email@example.com, or at (800) 551-7379, ext. 1541.