December 1, 2007As 2007 comes to an end, it appears the directional drilling market had a pretty good year in terms of the amount of work out there and projects being bid on and completed. Equipment appears to be moving and industry manufacturers debuted new technology at the different trade shows throughout the year, with plans for more in 2008.
With all this positive news, there is, of course, a glitch (isn’t there always?). Yes, fiber-optic work has allowed the compact and mid-size market to regain its footing but at what price, some contractors ask. HDD contractors continue to voice concern over what they believe is the lagging state of a project’s price per foot (or simply HDD rates) for HDD projects, believing the going rate is too low. A favorite target of contractors has been the telecom or fiber-optic owners over what they consider to be low pricing and even slower payment for the work completed.
HDD rates are not what they once were, when you compare them to the heyday of the HDD market some 10 years ago. Trenchless Technology will continue to explore this topic in 2008, getting the perspectives of various industry insiders, experts and drillers.
In these pages, we approached a few contractors to get their thoughts on the status or plight (some would say) of HDD rates in the market today. In full disclosure, a few contractors we contacted declined to comment on our questions, as this has become a touchy and complex topic in contractor and bidding circles.
Contractors, with varying years of experience and types of HDD applications and opinions, who agreed to answer our questions were: Grady Bell, Laney Directional Drilling; Will Roth, Precision Directional Boring LLC; David Haynes, Mears Group; and Jason Hockran, H&H Enterprises.
What effect has the practice of using multiple layers of contractors on a drilling project had on HDD rates?
Hockran: The key to any HDD project where the HDD contractor is a subcontractor is to specify the experience requirements to bid on the job. The general contractor may receive bids from HDD contractors that cannot actually complete the work or if they can, this will be their first attempt at a more complicated scope of work. These bids will possibly be cheaper than the other more qualified HDD contractors bidding the work. If the general contractor is not given experience requirements for HDD contractors, they will hire the cheapest and see if they can get the work completed. If the work is not completed by the cheapest contractor, that is when the project can become delayed and complicated.
Haynes: Not much. I believe each contractor will price accordingly to what they can handle. It could be more advantageous to the owner’s project. Each contractor is going to price according to the job specifications and the complexity of the job.
Roth: Multiple layers of contractors hurts the whole HDD industry as far as rates go. By the time the contractor who is doing the actual work gets paid, the rate is extremely low. As long as contractors are willing to work for the lower rate, the rates will not increase.
What effect has the fiber-optic market had on the price per foot/rates?
Roth: The fiber-optic market has hurt the HDD industry as a whole. The last mile work rates are extremely low. A lot of contractors are looking at the footage and feel they can make a lot of money by putting in more footage. Consequently, they do not make enough money to cover the expense of potholing that needs to be done. This leads to more utility hits (sewer/water/gas line). In return, some municipalities have banned HDD and look at HDD as a non-viable way of installing utilities. HDD contractors also need to be aware that water and sewer installation takes more time and experience to install than cable. We contractors need to be more knowledgeable and accurate in the installation of underground utilities and we must have at least some knowledge of grades and sewer alignment.
Haynes: All prices are going up in all markets. I’m not sure there is much influence from the fiber-optic market on large HDD projects.
Hockran: In recent history, the fiber-optic market had most municipalities frustrated with HDD work because of existing underground utility damage. In the last few years, municipalities and their engineers are very open to the benefits of HDD. Again, the dynamics of any given HDD project make them very difficult rates in a general sense. Rates for HDD work are relative to the specifics of the project scope and the geographical area for the project. Last mile work is developing and allowing HDD contractors to diversify back into the fiber-optic market. I believe the rates for last mile work and other HDD markets (gas, sewer, electric, water, etc.) will be comparable, relative to the scope of work completed. I cannot emphasize enough the importance for HDD contractors to develop and maintain relationships with customers, municipalities and engineers to solidify and maintain workload and to further develop the integrity of the HDD industry.
It’s estimated that HDD rates are about 15 to 20 percent below market value. How would you describe the state of HDD pricing in the drilling market today?
Bell: Large rig HDD rates are running about 30 percent higher than last year. We are getting an average of $9 per diameter inch per foot (i.e. 20-in. pipe is averaging $180 per foot). This is much stronger than in the past. We see the price still going up.
Roth: I feel the rates are more like 20 to 30 percent below market — hopefully they will start to keep up with the market. Telecommunication rates are extremely low. They do vary from area to area and from state to state. Large companies, like Verizon, are basically telling contractors what they will pay and a lot of contractors do not know their costs and accept what is dictated to them. Rates are better than in the past few years and have stabilized to a certain degree. Example: Engineers are doing more design in the sewer and water areas and this has been a great help in bringing the market up.
Haynes: Earlier in the year when much of the work that is going on now or late last year was bid, you saw pricing used that was reflected with those market conditions. However, as this earlier bidding and those projects finished, the pricing in drills would cost much high than 20 percent. As availability of equipment begins to tighten, then the simple fact of supply and demand forces take over. Owners that jumped in early with these projects received favorable pricing, but will probably not see those same numbers for similar projects for a while. You will see pricing of HDD increase contributed to supply and demand of available rigs, as well as those variables outside the contractor’s control, such as steel, fuel, etc.
How much of a concern is the price per foot on your business today? How does it affect what jobs you bid?
Haynes: Most jobs are not easy anymore. Pricing today reflects the complexity and technology that is used by the HDD contractor. As we continue to push the envelope in directional drilling, pricing will reflect the scope of work that is involved to complete crossings that were not thought of five years ago. We certainly take a serious look at all RFPs from those clients that have put together a thorough package for review and are going to be looked at more favorably than those requiring more engineering on the contractor’s part to decide, if the project is feasible. Re-designing an HDD crossing is time-consuming for our engineering staff who is already extremely busy. This added task pushes the cost up. There is always the look at risk vs. reward.
Roth: Price per foot is a big concern because it affects the bidding process. It is hard to compete in price with a boring contractor that does not know their true costs and the value of the service they are offering. When bidding, you sometimes have to look at the competition and if you know the price per foot rates will be way below yours. A judgment call must be made on whether to take the time to bid. Competition in bidding is a good thing as long as you are bidding against a good competitor. I think of a good competitor as someone who knows their costs and does quality installation and is keeping the needs of the customer in mind. This helps the whole HDD industry. Whether you get the job or not, you are still in a win-win situation as more municipalities and engineers design more work for the HDD industry.
Hockran: Determining price per foot to complete a project and how to make a profit is something an HDD contractor does every minute of the day! In many instances, the evaluation of any project will take anywhere from a few hours to a few days. A contractor’s history of projects and profit margins on previous bid and completed work will be key to help determine the pricing for bid work in the future. Most of this thought-process will focus on the specifics of a project as mentioned above, but a good contractor will also consider the customers’ integrity and relationship, as well as future workload. Price per foot is the bottom line in the HDD industry. It seems like a simple process to determine a price per foot, but it requires strong expertise and good communication skills to properly evaluate a project to generate a bid for a successful project for all parties involved.
What are the key factors that affect HDD rates today?
Bell: The key is the tremendous amount of work and the limited number of large HDD rigs.
Haynes: Probably the most significant factor is the availability of equipment and crews. Beyond that, you have your usual auxiliary services to support the HDD. Other factors include the degree of environmental control and regulations placed on the contractors.
Roth: Contractors who do not know their costs affect the rates. We must know what it costs to run equipment and overhead costs. Knowing what it takes to be governmentally compliant. Contractors must realize that government fees related to an employee’s paycheck have to be considered when pricing a job. Most important is knowing what our work is worth.
Sharon M. Bueno is managing editor of Trenchless Technology.