For Drilling Jobs, Consider Inflation when Setting Prices
As most of you know, I’m semi-retired. But I’m still active in the industry. I don’t drill much anymore, but I do write bids and procedures, design tools, and (my favorite) do occasional fishing jobs. I recently had lunch with a friend in the drilling business. We eventually got around to well prices. I asked him, when was the last time he changed his prices? “Ummm, a couple years ago, I guess.” I asked him if he was doing OK. He said that money is harder to make and hold onto, too, and his income was down.
When was the last time you stopped to figure out what it cost you to drill a well? He looked at me with a “deer in the headlights” look and said, “Well, I raise my price every now and then when my competitors do.”
My friends, that is not how it’s done! It doesn’t make any difference what your competitor charges. He does not have your costs, or your profit margin. This has been a problem in our industry since day one.
Many drillers are afraid they are going to miss a job if they charge more than their competitors. This is only partly true. There are going to be X number of wells drilled in your area, no matter the price. You will never hear a customer say, “That’s such a good price. I’ll take two.” You’ve likely not heard a customer say, “The price is too high. I guess I’ll go without water.” He’s going have a well drilled, no matter the price. In order to stay in business, you have to charge enough to stay in business and make a profit.
Every well costs a different amount of time, money and materials to drill. If you drill two wells on adjacent lots on the same job, they will be different. Did you charge to mobilize and demobilize to the first well, the second well or split the cost between them? These costs all affect your bottom line.
One of the best ways to keep track of these costs is to use a bidding spreadsheet. You can Google dozens of them, and find one that works for you. Then it becomes a fill-in-the-blank exercise to figure costs and profit. I guarantee this will surprise you. We all expect costs like casing, mud, pumps and other items to be there. But operating a business includes other costs. Did you include insurance? The insurance cost per well is the annual premium divided by the number of wells per year. If you only drilled a few wells per year, the cost per well will be much higher than if you drilled hundreds. Licensing and permitting are costs, and should be included in the bid for every job. Some states require the owner to get the permits and some require the driller to do it. This can change the bid significantly. The permit may only be a few dollars, but what about the secretary that fills out the paperwork? She gets paid, too.
Good bidding software has a blank for all these costs and more, many that you haven’t thought of. Even if you don’t use it every time, it is still a good idea to refresh your information periodically. When I was drilling 200-plus wells a year, I would do it on every oddball or distant job, then about once a month for my normal, neighborhood wells. When my supply house bill came in, I would update the price of materials etc. You would be surprised at the changes. If you feel that it seems to cost more and more to drill a well, you are probably right, and that needs to be figured in your bid.
One factor that is easy to ignore is inflation. It is an upward push on prices and costs. Usually a small amount per month, but unrelenting and insidious. Over time, it adds up. Did you know that the federal government doesn’t print our money? It is printed and distributed by a private company called the Federal Reserve. They basically rent us our money and charge interest on it. This is called the prime rate, so they can make a profit on every dollar in circulation.
The rate varies but, over time, it always goes up. Consider this: In the year the Federal Reserve was conceived on a little island off the Georgia coast (Jekyll Island), a man could buy a handmade, three-piece suit for a $20 gold piece. He still can. The value of the suit has not gone up and the value of the gold piece has not gone down, but the number of our dollars that it takes to buy the gold piece has gone to over $1,200! The value remains the same, while the price goes up. This is inflation, and it affects our bottom line every month. This is why we need to analyze pricing often.
Historically, prices have almost always risen. One of the few exceptions was the Great Depression. Prices fell because there was not enough money in circulation. The Federal Reserve system fixed that by just printing more money and renting it to us at interest. Everybody is happy.
My point is, prices are continuously rising, and if you don’t keep up you give yourself a continuous pay cut. You may not see it right away. You gave the customer a good break and got the job from your competitor. But if you didn’t factor in that bill from the supply house, you are spinning your wheels. If your competitor is significantly cheaper than you, try to factor his costs. Maybe he is new in the business and doesn’t pay himself or his employees much. Maybe his grandfather retired and gave him 200 brand new submersible pumps, who knows?
My friends, the bottom line is simply this: Know your costs, and figure accordingly.
For more Wayne Nash columns, visit www.nationaldriller.com/wayne.