Nobody wins the price war
Cutting prices in a time of rising costs.
September 13, 2011 By Treena Hein
Read Treena Hein’s update at the pricing problem (2018).
Some water well drillers are charging less than others, creating a conundrum for the industry. Here’s a look at the pricing problem and where your numbers should be to make a profit.
Water well drillers are under a lot of pressure. Contractors are struggling to pay bills in the face of higher fuel, electricity and equipment costs, not to mention more regulatory issues than ever. Work is scarcer. It’s also a challenge to provide the full-time, high-paying positions needed to keep employees, particularly in areas of Canada where labour competition with the oil or mining industries is fierce.
But there’s another source of pressure as well. Instead of there being a movement across the industry to account for the increased costs of doing business, some drillers are cutting their fees. Is this occurring because price-slashers have a poor idea of what they need to charge to keep themselves in business over the long term? Is it simply the pressure of needing to land the job? Perhaps it’s a matter of others planning only to be in the business for a relatively short period of time, and therefore not setting aside funds for the replacement of equipment and vehicles? Are there good reasons for offering significantly lower rates than competitors?
One reason a company in any sector may undercut another is because work is dwindling. There certainly is less water drilling business available now than there used to be, observes Canadian Ground Water Association (CGWA) first vice-president and Ontario director Kevin Constable. This is partly due to more municipalities choosing to go with water pipelines.
“Almost all of southwestern Ontario is pipeline-fed and more and more pipelines are being installed all over the region,” Constable notes. “This is happening in other areas of Canada as well.”
He adds, that based on some studies done in poorly constructed subdivisions with shallow wells and inadequate septic systems, “It’s virtually impossible now to create new subdivisions with wells. They must be located next to a community and be served by municipal water and sewer services.” The economic downturn has also meant fewer housing starts.
George McAllister, a director with the Alberta Water Well Drilling Association, points out that there are two main types of water well drilling companies out there – industrial versus the family-owned smaller type of business that does mostly residential water well drilling.
“The industrial guys have bigger overhead, and have to have more safety certifications, for confined spaces etc.,” says McAllister. “Since they do a lot of work, they know they have to have funds set aside to replace their equipment, and what they charge has to reflect that. They can’t just avoid doing residential work because there isn’t much money in it, they have to keep employees busy year-round.” He says smaller companies are often “just a guy and his dad and they don’t have to do a lot of wells to sustain themselves, or they have other jobs during the winter. Their equipment is not wearing out fast. Some don’t care if they replace it. They might only be in the business for 10 years and don’t care to put money aside to replace equipment.”
Constable thinks that while the lower prices these businesses offer might in the short term give them a competitive advantage in the residential arena, they are on a fast track of running their businesses into the ground.
“They’re also making those who charge what-needs-to-be-charged to sustain a business look like they’re gouging customers,” he says. He notes that some well drilling companies in southern Ontario are charging $31 per foot instead of what he says should be quite a bit higher.
“We seem to need to offer $43 a foot to even get a chance at a domestic job,” Constable says. “That’s down from $45 from early last year, and still below the high $40s to low $50s where the price needs to be.”
He stresses that these prices reflect realities in southern Ontario, where almost all of the drilling is overburden cased wells. He says in areas of Ontario where most wells are bedrock wells with limited casing, the prices are different – usually a lower footage rate with casing being extra.
Constable thinks one of the big problems throughout the industry is people relying strictly on footage prices.
“There are still the required extras that must be factored in, like well screens for overburden wells, and an environmental package as required by the Ontario Ministry of the Environment. Good pricing is also about including insurance, wages, emergency money for breakdowns, replacement funds for equipment, as well as rising fuel and employee costs.”
He says some drillers don’t understand the costs associated with some of these issues. “A simple 20 per cent mark-up on material costs is a money-losing proposition,” Constable notes, “because that doesn’t even cover your overhead on materials, let alone the cost in time for installation.”
Here is a quick demonstration of how costs have changed.
“A half-decent half-ton pickup truck used to cost around $2,000 during the early ’70s and today that same truck is over $40,000,” Constable says. “That’s a 500 per cent increase and we sure aren’t seeing those same numbers in what our industry is getting paid.”
In order to price properly, Constable says drillers need to figure in all costs, then add a simple profit margin of around 40 per cent. “You’ll then be in the area where profit can happen if all goes well,” he notes. “If things go wrong, or too slowly, due to unforeseen problems or equipment breakdowns, then that profit margin can shrink very quickly. Keep that in mind, as well.”
Pricing in Eastern Ontario and Quebec
Like other well drillers, brothers Jamie and Rob, and their parents Bill and Ann MacKinnon at MacKinnon Well Drilling Ltd. in Pembroke, Ont., are feeling the fuel price pinch (for full profile on MacKinnon Well Drilling, see page 18).
“We have used temporary fuel surcharges before, when fuel prices have shot up, but we’re holding off for now [in June] and we’ll wait and see what happens the rest of this summer,” says Jamie. MacKinnon Well Drilling was started four decades ago and has five employees besides Bill, Jamie, Rob and their wives Erica and Leah, who share office management responsibilities. They offer geothermal installations as well as water well drilling and servicing. Most of their jobs are within an hour’s drive and involve drilling into the bedrock of the Canadian Shield.
The MacKinnons charge $23 a foot for drilling and $15 a foot for casing. A minimum of 22 feet of casing is required by law and not needed in bedrock, says Rob (how much bedrock is encountered can vary widely, even between sites as little as 600 metres apart).
“We also charge $1,100 for the environmental package, which includes a 10¾ inch hole, grouting, a driveshoe on the bottom of the casing, chlorination, a vermin-proof well cap and a pumping and recovery test,” he explains. Their prices have held steady for about the last five years. “We find that we’re pretty much always the first in the area to increase prices and others then follow,” notes Jamie.
Drillers from nearby Quebec just across the scenic Ottawa River do some work in the Pembroke area, and the MacKinnons find that these companies generally charge less per foot. “I think that if our rates were similar, we would not have the capacity to return and deal with any problems at no extra charge, which is a very important assurance we provide for our customers,” Jamie says. “Companies that are charging rates that low, it also makes you wonder how they’re not taking shortcuts.” A common example of this that the MacKinnons sometimes see is the skipping of pressure grouting. “Some companies are just throwing a bag of hole-plug in at the top instead of pressure grouting, which of course is against Ontario regulations and a threat to well water quality,” says Jamie.
However, Rob adds that some companies that charge lower drilling and casing fees also add “hidden” charges on to the bill later, for things like grouting and test pumping. “This means the total price of the job can end up being more than what we charge,” he says. “These things aren’t discussed with customers up front, and so initially, they only get this low drilling rate quoted to them. It sounds great, but the total bill later is a shock.”
Some Quebec water well drillers have not been charging as much as they need to in order to deal with future equipment replacement, retaining quality employees and other things like rising fuel costs, observes Simon Massé, the Quebec representative on the CGWA board, and a co-owner of Groupe Puitbec Inc. in Victoriaville, Que. That’s why the Association Puits Pompes Québec (APPC, of which Massé is also a board member) just finished a study of water well drilling costs across the province. “We found that increases in the price of fuel mean that it costs a driller about 50 cents more a foot this spring to drill a water well in comparison to last spring,” says Massé. “In general, we found that it costs a driller about $17.50 per foot for water well drilling. Sealing with bentonite costs a driller $900. Profits must be added on to these figures.”
Massé says that most drillers charge customers about $21 now per foot in total, and when analysis of the report is complete, the APPC will provide a customer pricing recommendation for Quebec drillers.
In tough times it’s hard not to abide by “every man for himself”, but the overall industry will benefit and grow stronger from a commitment to pricing itself for the long haul.
Treena Hein is a science writer based in Ontario.
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