Recession-Proofing the Business

Every business owner needs to do what they can to ensure their business is as resilient as possible.

By Mike Price

Ramsby Drilling Inc. in Indian River, Michigan, used extra revenue from 2022 to double the size of the company’s shop by 6300 feet while remaining debt-free. The fifth-generation company switched from propane to natural gas in late October 2022, which is expected to slash its costs by at least 50%. Photo courtesy Bill Ramsby, president of Ramsby Drilling.

Even though the water well industry has been booming with work in recent years, and despite water wells being essential for life, many are preparing for a recession.

Some believe the fragile economy with persistent inflation and ongoing supply chain issues already entered one in late 2022, but according to the traditional definition of a fall in gross domestic product for two successive quarters, the United States was not in a recession as of December 2022.

That may be changing though as the U.S. Treasury yield curve has moved to its most extreme levels since the 1982 recession due to large drops in long-term bond yields as reported in late November 2022. The yield differential between 10-year Treasuries and three-month bills has accurately predicted every U.S. recession since 1955.

The inverted U.S. Treasury yield curve doesn’t predict when or how long a recession may last, but the water well industry operates within a niche of the construction trade that provides life-sustaining groundwater, thus delaying the effects of a recession.

Still, if a recession does occur, every business owner will need to do what they can to ensure their business is as resilient as possible.

“Some key issues businesses will want to try to address are cash flow, debt management, supply chain consistency, and diversification,” says Jason House, LG, PG, president of the National Ground Water Association and practice leader of applied hydrogeology and senior principal at Woodard & Curran Inc. in Portland, Maine.

“Maintaining cash flow and sufficient cash on hand to meet business needs will help owners weather the storm. Adequately managing debt and being cautious about taking on new debt will also help businesses. Good relationships and communication with your suppliers will help the owner maintain good delivery of services to customers during difficult times.

“Lastly, obtaining new skills and diversifying service offerings will help owners smooth out the rough spots in areas of their business that might experience a downturn during a recession. There are some great training opportunities offered through NGWA and we’re looking to expand them this year to help our members train their employees and create a more resilient workforce.”

Indeed, business owners realized the value of debt management during the housing crisis that brought new home construction to a standstill without much warning in 2008. This occurred during the Great Recession, which began in December 2007 and ended in June 2009, making it the longest recession since World War II. Unfortunately, some companies that were in debt during this time didn’t survive.

For long-term business survival, business owners strive to be debt-free while both keeping overhead low and still taking care of their employees. Some even try to pay ahead on equipment or property while building a reserve that can help weather a potential downturn for six months.

“Almost everyone had a really good year [2022], and a good year means a profitable year and myself, as much as it’s nice to take profits and go wild and buy a new company truck and look at new rigs, I’m more of the train of thought of slow and steady growth,” says Bill Ramsby, president of Ramsby Drilling Inc. in Indian River, Michigan, who created a work-in-progress action plan to counter a recession more than two years ago.

“I’d like to have a good year even though I’m in a great year, I’m okay with a good year. And by taking our extra profits, I’m buying the materials for our wells for 2023 in case it’s pretty soft. I feel a lot more comfortable to know that a lot of my major costs are already paid for.”

Some contractors like to say, “Don’t ever go broke when the work is good.” Some believe it’s necessary to step out of their comfort zone to diversify during a slowdown. As 2023 begins, here’s how companies have diversified and recession-proofed their businesses.

Geothermal Is Making a Comeback

Ramsby Drilling was subcontracted by a large drilling contractor in 2021 for the vacuum trucks and crane for a 10-inch irrigation well nearly 400 feet deep for a golf course. Ramsby Drilling often works together on projects in its region with this large drilling contractor that is based out of state.

A rise in geothermal interest is occurring because of the extension of residential and commercial tax credits, which were set to expire in 2023, being extended through 2034 through the passage of the Inflation Reduction Act of 2022. Water well contractors who have diversified into this line of work will be able to benefit from it.

Yadkin Well Co. Inc. in Hamptonville, North Carolina, diversified into geothermal 30 years ago but was not fully invested in it until the Great Recession.

“Geothermal was a good sidestep for us in 08 after the last recession hit,” says fourth-generation Matthew Brown, CWD, CVCLD, co-owner and secretary/treasurer of Yadkin Well and vice president of the North Carolina Ground Water Association. “We had to travel and stay in a hotel some but stayed busy and didn’t have to lay off any employees.”

Geothermal work in 2022 was down from what it typically is for Yadkin Well, but due to the extension of the residential and commercial tax credits, interest is picking back up.

“Most of our jobs currently are commercial. So, 10 to 15 percent at the moment,” Brown said in late 2022. “We are running five rigs. We have a lot of calls, and by diversifying, we do vertical, horizontal, open [pump and dump], and lake loops.”

For those considering taking on geothermal work, Brown says proper grouters and tremie reels are needed.

“Proper grout type and placement is the key to the loop success,” he says. “You can’t be cheap when purchasing a good grouter. We use Geo-Loop machines. Also, a safe way to safely install the loop into the well without causing kinks, burrs, or scratches to protect the life of the loop and operation.”

Brown, who earned the Certified Vertical Closed Loop Driller (CVCLD) designation from the National Ground Water Association in 2013 and believes it has helped secure commercial projects, says grout is the most overlooked component of a geothermal operation.

“Proper type and density along with the proper method of emplacement are the key to the loops’ efficiency,” he says. “We prefer silica sand and bentonite grouts for loops. Not using a tremie pipe or using well casing grout in lieu of thermal enhanced grouts hurt the loop performance.”

Brown, who operates a 2012 GEFCO 30K-DH and primarily uses down-the-hole hammers, doesn’t mince words on how to operate when work slows.

“I believe you have to diversify or die during recession times,” he shares. “Try to play the game of updating equipment when the economy is strong and get your depreciation but don’t chase that so hard you get in over your head if a slowdown comes and they always do.

“Let’s say I’m just going to do new wells and installs. When the economy falls and no new houses start to go up, then you have to get real and say I’m now going to do repair work, even stuff I didn’t install. Maybe focus on doing abandonments or think about water softening/filtration.”

Ramsby Drilling purchased its light tower five years ago and it has been a great upgrade compared to the flashlight days. The company uses it on large wells where once the setting of casing begins there is no stopping. Ramsby Drilling uses its light tower about two times a year. Photos courtesy Ramsby Drilling.

In Maple Plain, Minnesota, National Ground Water Association Past President David Henrich, CWD/PI, CVCLD, president of Bergerson-Caswell Inc., also saw a spike in interest for both residential and commercial geothermal before the close of 2022.

Henrich was part of a panel discussion on “Bringing Water Well Drillers into Geothermal” at the International Ground Source Heat Pump Association 2022 Annual Conference and Expo in conjunction with Groundwater Week 2022. The panel discussion covered the benefits for water well drillers in the geothermal industry and how IGSHPA can encourage water well drillers to consider geothermal installations.

“It ended up being a healthy discussion about what that industry needs to do to be in a position to grow going forward,” says Henrich, who serves on NGWA’s North Central Regional Policy Committee.

However, Henrich doesn’t believe there are enough water well contractors to satisfy the geothermal demand in his region in 2023.

“In a couple of weeks [as of December 1, 2022] our rig will potentially be booked for all of 2023 and adding capacity has been difficult due to an extremely tight labor pool,” he says. “I predict there is a wave of geo coming that should provide a lot of opportunities for people. The catch is that most contractors are already busy with well work. This means the geo industry is going to have to compete for their attention, which will be difficult.

“The last geo boom happened against the backdrop of the Great Recession, which forced contractors to diversify. I’m not convinced the same pressures will exist over the next several years.”

Adapting to Geothermal and Taking On Shop Projects

Ramsby’s company diversified into geothermal in 2010 following the Great Recession and was beginning to field more calls and providing quotes heading into 2023.

“I remember right after 2010 doing quite a bit of geo drilling,” says the fifth-generation water well contractor. “Now there’s too much of a demand for water wells and I haven’t done as much geo jobs but I can see that coming back around.”

According to Ramsby, the best part of geothermal is that it begins with just the drill rig that a company is operating in their area.

“There is lots of great equipment to make the job easier, but to get started, use what you have,” he suggests. “Don’t bid a geo job cheap to get the work. Bid it to make money. You won’t get every job for sure, but the one or two you do get, take profit and start moving that towards the better equipment as you go and ease into it rather than jumping in with both feet.”

There are specialties within the geothermal field. Ramsby’s company installs geothermal systems for lakefront homes and uses vacuum trucks (oilfield vacuum trucks set up with large vacuum pumps) to eliminate the mud mess, drill cuttings, or equipment marks along with sodwork and landscaping (subcontracted).

This approach to geothermal, irrigation, and even development water requires additional steps, work, and equipment, but Ramsby says customers are more than willing to pay a premium for it.

“For us, our vacuum trucks are just as important as the drill rig,” he says. “Most jobs we couldn’t drill without them. “For our area, we needed the ability to handle the development water. We are glacial and use a lot of drilling mud and a lot of development water breaking down that drilling mud. Lots of flowing wells too.”

Beyond geothermal work, Ramsby’s company always takes on shop projects during the winter. Ramsby says his company can fabricate most anything and in fact made and installed many flagpoles from leftover casing during the Great Recession.

The fabrication work is typically for local water well contractors—everything from mud tubs to water tankers to anything else needed. Some of the shop projects are for the company itself.

“Come wintertime we’re not drilling, and a few guys don’t like to get laid off, so we’ll keep shop projects for those guys,” says Ramsby, whose company has served northern Michigan since the 1890s.

Looking back on the Great Recession, Ramsby most remembers working with existing customers that reinforced the importance of customer loyalty.

“There’s a lot of builders we worked for in 08 who are still around now,” he shares. “They survived 08 and they survived before then and they’re around now. I remember back in 08 a lot of fly-by-night builders and contractors popping up who were gone as soon as things slowed down, and right now we’ve got contractors popping up in every corner wanting to pay you a premium to do their work.

“I would rather stick to our existing customers because they’re going to be the ones who are there for you tomorrow and the next year still.”

Connected to Other Lines of Work

Buddy Sebastian, vice president/general manager of Sebastian & Sons Well Drilling Inc. in Springport, Michigan, lists many different options that water well contractors can easily transition to and others that may require some hiring. They include:

  • Cathodic protection drilling/installation
  • Dewatering/drilling
  • Geotechnical drilling
  • Geothermal drilling
  • Septic and drain field installation
  • Water conditioning and treatment
  • Water testing and even lab services
  • City water connections.

“Depending on state and local laws, the above are some areas that we can diversify into,” says Sebastian, who was elected as a NGWA Board Director at Groundwater Week 2022 and co-presented a business workshop, “Understanding Your Inputs, Protecting Your Margins, and Generating Enough Revenue to Replace Equipment on Schedule,” at the annual event.

With some creative hiring or even merging two companies, Sebastian says a company can go into the following:

  • Water systems engineering services (may require an engineer or hydrogeologist)
  • General contracting
  • Plumbing
  • Mechanical contracting
  • Electrical contracting.

“Remember the more you get, the more the headache you may attain,” says Sebastian, who is also president of the Michigan Ground Water Association and shares more on how to figure out cost per hour (see shaded sidebar).

NGWA Business Resources
Addressing the Training Issue
In addition to in-person educational events like Groundwater Week, NGWA University is helping train the groundwater industry with its online platform, Drilling Basics Online. Click here to learn more.

Getting Creative in Managing Costs

By fall of 2022, to control costs in 2023, Ramsby had purchased materials and nearly all the company’s most common pumps (1/2 horsepower, 12 gallons per minute) to cover the company’s first 100 wells.

“I would like to purchase more [materials] once I get to my comfortable level,” said Ramsby in 2022, who planned to take advantage of a 10% sale from his supplier in October. “I’m going to switch to paying down a couple of our loans on our equipment. It’s pretty customary for our mini excavator to be paid up at least six months ahead of time. I’d like to expand that out to a year ahead of time to give ourselves some cushion.”

Ramsby has two mini excavators, one which is always paid for, and one which always has a loan. He cycles those out frequently due to their high wear nature and opts for the extended warranty which gives him four years, which, according to him, is when the major replacement of the rubber track is likely. That replacement cost is about $5000 to $6000.

“You get a pretty good return on trade-in before the hours are too high,” he says, “so typically right around when out of warranty—so I don’t have to worry about major repairs—we’ll trade it in and always have a new one, which always means we have a payment on a new one, but we’ve always got one that’s paid for. The system has worked out well for the last five years.”

Another lesson learned by Ramsby from the Great Recession is vehicle and equipment maintenance. This includes expensive repair items.

“You know, it’s pretty hard to afford when your $40,000 [two main] hydraulic pumps go out on a rig in a bad year but knowing that the manufacturer says it goes out usually at the 8000-hour mark and you’re at 8000 hours, it’s wise to replace those things now when you can afford them when down the road it’s much harder to,” Ramsby explains.

“So, everything from trucks that are going to need tires to drive tables and mud pumps and things you know probably next year [2023] you’re going to rebuild the power end of the mud pump which is pretty expensive. We’re going to be doing it this winter and buying the parts to do it now [2022]. Our biggest cost after supplies is equipment maintenance.”

Ramsby, who used extra revenue from 2022 to double the size of the company’s shop by 6300 feet while remaining debt-free, switched from propane to natural gas in late October 2022. It was expected to slash company costs by at least 50%.

“Propane in our shop is pretty expensive,” he shares. “Living in northern Michigan, we pretty much stop drilling in January but keep the shop heated all winter long, so we got four months of not much for income but lots of expenses. I guess I have a leg up in recession from our location. We’ve always stopped work about Christmastime and don’t pick back up until springtime.”

Typically, Ramsby doesn’t like to book work too far out into the coming year, but considering a possible slowdown in 2023, he was expected to book jobs into September 2023 and take deposits on them.

“Two things: I’m taking deposits to price-lock the customers in at today’s prices in case the prices happen to fall, and it’s making sure I got a decent supply of work to start off next year,” he explains.

Finally, Ramsby has used diesel fuel contracts to control costs with an increased workload dating back now five years. He wasn’t ready to lock in his diesel fuel price in October 2022 and was planning to watch the prices through the winter.

“I was thinking $3.50 a gallon was my price point, but I’m going to wait a little longer yet to see if it goes a little lower than that,” he says. “It touched that three or four weeks ago [in 2022], but I haven’t pulled the trigger yet and figured I’ll wait it out a little further yet.”

Viewing Materials as a Savings Account

Like others in the industry, Ramsby has an accountant and checks in with his twice a year based on the seemingly ever-changing tax laws (click here to read the People at Work column on tax tips for small businesses).

While Ramsby listens to his advice, it doesn’t always mean Ramsby is following his advice. For example, Ramsby’s accountant told him it wasn’t beneficial for him to build an inventory of materials and instead should keep money in the bank.

“I did the opposite. I put our money in the inventory rather than money in the bank and here doing so on casing I probably made a 300 percent margin whereas money in the bank wouldn’t get you anything nowadays,” says Ramsby, who laughs when sharing that sometimes he’s given the accountant insight.

“Accountants really want you to keep money in the bank, but in today’s world, it seems like it makes you more of a target from everything from embezzlement to bank fraud to a cyberattack. If you put it into your inventory, nobody’s looking to steal a pallet of drilling mud from you. It’s good to keep money on hand. You need to meet your cushion amount, plus your operating expenses, but I feel much more secure with tangible objects.”

When Ramsby took over for his retiring father, Mike, in April 2016, he quickly learned about managing the monthly supply bill. He realized that it’s much easier to handle the supply bill that runs anywhere from $80,000 to $100,000 per month when he wants to rather than when he needs to. It’s also during this time that Ramsby learned to view his inventory of materials as a savings account.

“Since I’ve built up a large inventory, you treat it like your savings account that I can draw down my inventory when I need to make a major purchase,” he explains. “Then of course when I have excess money, I like to build it back up and it works pretty much exactly the same still. One thing to realize now is materials are expensive and if there’s a recession, they’re going to go down.

“Right now, the materials are expensive, but when you’re charging the price like you should be doing, there’s a higher margin on those materials. And when things slow down, materials go down in price but there’s a lower margin when down on price, so even though some people don’t like buying materials now when they’re a little more expensive and want them to wait for the prices to come down, you’re actually making a higher margin off of higher expensive materials now, so it kind of negates the cost savings later on when they go down.”

______________________________________________

Ramsby believes the recession will be on the shorter end, limited to possibly a year and a half. In the meantime, Ramsby was working in 2022 to cultivate and secure bids for larger projects in 2023.

“There’s a few big projects out there that because of cost they haven’t done it yet and are waiting on the cost to come down and the economy to slow down and materials to come down,” he says, “so hopefully they’ll come around when things slow down.”

With the heavy workload and pace the industry has been working over recent years, Ramsby has mixed feelings about a recession on the horizon.

“I actually wouldn’t mind slowing down a little bit,” he shares. “I’ll probably complain when it happens, but for a little while I wouldn’t mind it. I think a lot of people look forward to slowing down a little bit. Everybody has been really busting their butts keeping up—it doesn’t matter which corner of the country you’re at.”

How to Figure Cost Per Hour
Buddy Sebastian, vice president/general manager of Sebastian & Sons Well Drilling Inc. in Springport, Michigan, has presented on a critical topic to state association conferences—how to figure cost per hour.  Sebastian recommends how a company tackles it below.

First, Sebastian says to take your financial statement from the previous year to get the figures needed.

Buddy Sebastian

Direct labor is labor that is actually billed or making you money. Indirect labor is on-staff mechanic, secretary, yourself if you are not doing drilling, service, or installations.

Total expenses including payroll are all of your expenses from the year before including fuel, taxes, etc. No supplies go into this figure.

Total payroll minus indirect labor: $_____________________
Divide this by total hours worked: ____________________
Hourly rate 1 $_____________________
Total expenses minus direct labor ____________________
Divide this by total hours worked: ____________________
Hourly rate 2 $_____________________
Add hourly rate 1 and 2 together
This is your COST per hour $_____________________

The above is your cost per person
Divide by .7 for 30%, .6 for 40%, or .5 for 50%, etc.
To add in your profit margin = your charged hourly rate.

Some things to consider, according to Sebastian, is “you will never bill every hour worked, so make sure your price is comfortable to help cushion.

“Your profit on the pumps, tanks, pipe, wire, etc. will help cushion that also. Finally, account for the ‘warranty’ issues we don’t get paid for or that job that just doesn’t work out.”


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 mprice@ngwa.org, or at (800) 551-7379, ext. 1541.