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ESOPs as an Exit Strategy for Owners of Construction Companies

By Chris Hirschfeld, ASA, MBA, Director of Exit Planning, Somerset CPAs and Advisors

Running a profitable business is a daily challenge for most business owners. Finding an exit strategy is a challenge that every business owner will eventually face. It is especially true for many in the construction industry. If you want to sell to management, how often do they have the funds to buyout the owner? If you want to arrange bank financing for a transaction, what impact will this have on your bonding? If you want your children to remain in the business, how willing is a buyer to honor that request? If you consider selling to a competitor, what is the risk of sharing proprietary information with your competition? What if the deal doesn’t go through? How often do Private Equity firms even look at construction companies for their portfolio of acquisitions?

The list of issues above is exactly why more and more construction companies are turning to ESOPs as an exit strategy. What is an ESOP? It stands for Employee Stock Ownership Plan. It is a vehicle by which business owners can sell their stock to the employees through an ESOP Trust. The ESOP Trust buys the shares for the benefit of all employees. Not only does it provide an exit strategy for the current owners, but it also creates an ownership mentality among all the employees because all employees will have an economic interest in the success of the business. 

An ESOP is a qualified retirement plan. Therefore, it is governed by the same rules that apply to other retirement plans such as 401k or SEP or SIMPLE IRA’s. ESOP plan documents will specify eligibility, vesting, and retirement ages, just like other retirement plans. The accumulation of value inside an ESOP grows tax deferred, just like all other retirement plans. Employees only pay ordinary income tax when they withdraw their funds from their ESOP account just like any other retirement plan. When employees retire, or leave the company for any reason, however, they must sell their stock back to the ESOP. The stock never leaves the company. The terminated employee may roll their cash proceeds into their IRA or 401k if they wish to further defer taxes on their ESOP account after retirement. The one thing that makes an ESOP unique among retirement plans is that, by law, ESOPs are allowed to hold employer stock as its only security. 

When setting up an ESOP, current owners must sell their stock at fair market value, as derived by an independent appraiser. This is a market-based price which gives owners a value comparable to what the current market would bear. Often, “fair market value” is a higher price than formulas many companies have in place within their buy-sell agreements. Once the owners sell their shares to the ESOP, the ESOP Trust will allocate shares to employees over several years. This creates a long-term incentive for employees to remain with the company. It is why ESOPs have become such a wonderful retention tool. It is like a “golden handcuff” for all employees. If they leave, employees lose their unvested balance and also walk away from the potential of future share allocations. 

One of the biggest benefits to ESOP-owned companies is that management does not have to change. Corporate governance does not have to change. The day-to-day operations do not change. The company remains local. Headquarters will not be moved out of state. The local community benefits when companies don’t sell to out-of-state companies. There is one additional benefit to the owners who sell their shares to the ESOP. If they remain employees after selling their stock, they may also participate in the ESOP to build additional wealth.

In today’s tight labor markets, ESOPs are especially attractive. Imagine being in competition for new hires. Your company can offer not only salary, wages, and a 401k plan, but also a second retirement plan that the company contributes to (not the employee). How many employers offer two retirement plans? This will make your company more attractive to potential new hires in a tight labor market.

What types of companies make good ESOP candidates? ESOP candidate companies should be profitable, with stable earnings and some growth potential. If the company has the capacity to borrow money, the selling shareholders can get more cash up front as part of the deal. Owners who want to keep the company local will find ESOPs attractive. If you already have an employee-ownership culture, your employees will treasure the ESOP benefits.

ESOPs are only available to corporations. LLCs and Partnerships would have to convert to either an S-Corporation or C-Corporation before forming an ESOP. One of the advantages of a C-Corporation that forms an ESOP is that the sellers can get tax deferral on their capital gains if the ESOP buys 30 percent or more of the ownership. One of the advantages of an S-Corporation forming an ESOP is that income taxes on corporate profits can be eliminated. S-Corporations do not pay a corporate income tax. Corporate income passes through to the shareholders who pay the tax. If an S-Corporation is owned 100 percent by an ESOP, the corporate income tax liability passes through to the ESOP, which is a qualified retirement plan. Qualified retirement plans pay no income tax. Therefore, a 100 percent ESOP-owned S-Corporation is a tax-free entity. Imagine not having to make income tax distributions equal to 30 to 35 percent of the corporate income each year or in quarterly installments. That cash can be retained and used for other corporate purposes (pay down debt, bonuses, acquisitions, etc.).

The company will incur added expenses to an ESOP. ESOPs require a trustee, an independent business appraiser (who appraises the stock each year for the benefit statements), and legal counsel. Additionally, a record-keeper/third-party administrator must be retained to administer the plan, file necessary annual tax forms and produce the employee ESOP benefit statements. The corporate income tax savings alone, however, can more than offset the increased operating costs for an ESOP.

In summary, there are several reasons an ESOP might be an attractive exit strategy for business owners in the construction industry. It allows the owners to sell their stock at a market-based price. It provides a means by which the owners can sell the company, but the company remains local. The ESOP has a built-in mechanism for buying shares when employees leave the company, so there is always a market for minority interests. ESOPs help build an ownership mentality among employees. An ESOP provides a second retirement plan for all employees that builds value over an employee’s career. This additional retirement benefit will make your company unique and creates an attractive recruitment and retention tool. ESOP-owned S-corporations can eliminate corporate taxes altogether, creating a unique source of cash flow unavailable to most other corporations. If you have a business that you would like to turn into a legacy, an ESOP just might be that vehicle. 

The Ride to Success

Catom Trucking Grows Business Through Strong Partnership

From serving a few surrounding counties to spanning the entire Midwest, Catom Trucking has grown significantly over the years. But it isn’t catchy advertising or feet-on-the pavement sales efforts the construction and aggregates equipment hauling company credits for its success; they believe their customers led the way. 

Catom Trucking is able to fulfill unique customer needs with the help of Talbert Manufacturing and its comprehensive design process. (Photo Courtesy of Catom Trucking)

As the opportunity for construction projects increased year after year, contractors took the wheel, driving business and expanding into new territories. And when contractors needed dependable equipment hauling, Catom sat shotgun for the ride to help navigate the road to success. 

A Strong Start

Catom Trucking started in 1979 as a modest family owned and operated trucking company in Chicago. Tom and CathyStellman, Owners, recall the early days when they named the company by merging their two first names together. 

“We started out of our home with one truck and dump trailer hauling sand, gravel and asphalt,” said Tom. “We also leased one lowboy to pick up pavement equipment in the early mornings and evenings. It was a pretty simple operation.”

Many of Catom’s customers were earthmoving, roadbuilding and sewer contractors who relied on the company for getting their large equipment to and from jobsites. Catom was called upon by its ever-increasing customer base to haul everything from trenchers to excavators.

By 1995, the number and size of contracting companies Catom served grew to 25. Catom itself had grown, as well, to keep up with demand, running five trucks and 10 trailers. Up until this point, the trucking company was able to get by with “off-the-shelf” heavy-haul type trailers, but the size of equipment its clients needed hauled continued to increase and finally reached the company’s breaking point.

“Off-the-shelf” heavy-haul type trailers allowed Catom Trucking to get by in the early days of the business, but as clients’ equipment grew, so did the need for a custom solution. That’s when the company turned to Talbert Manufacturing for a solution.  (Photo Courtesy of Catom Trucking)
 

“For the first time, our customers were using 100,000-pound excavators, some of the heaviest at the time,” Tom said.

It was a logistical challenge not only for traveling through Illinois, but also across borders into other Midwestern states, where lower bridges and a multi-axle setups could be required. 

“We simply didn’t have a cost-effective way to haul the excavators in one load. The equipment would have needed to be disassembled and loaded onto multiple trailers, which was time consuming and more costly for our clients. Loading disassembled equipment also raised the risk of injuries. We knew it was time to look at a customized trailer.”

Catom needed a heavy-haul trailer that didn’t just serve the immediate need, but also could be used to haul a variety of other equipment, such as locomotives, and travel through multiple states. They knew this would minimize costs and prove to be more efficient not only for the business, but also their customers, as well. Plus, Cathy and Tom knew a trailer with the flexibility to haul a wide range of equipment would result in a strong ROI. 

Keeping Up with Demand

“We needed to grow as a company so we could grow with our customers and keep up with their demands, so we looked at what our biggest competitors were doing,” Cathy said. 

They noticed many of their competitors were running Talbert trailers. Catom already owned several standard Talbert units.

Catom Trucking owns and operates 30 custom Talbert trailers – 43 percent of its entire trailer fleet. The trailers help the company not only meet the needs of its current customers, but are designed to serve future customers as well. (Photo Courtesy of Catom Trucking)

Not only did Catom need to meet the needs of its current customers, but the company also had to ensure that whatever trailer they purchased could serve future customers. This included considering deck inserts and axle count and configurations. Because Catom had several other Talbert trailers in its fleet already, many of the components that would give them that flexibility were readily available; what one trailer needed for a specific load requirement could be pulled from another. 

The Talbert team met with Catom and its employees to discuss details. The criteria: 100,000-pound capacity trailer, achievable with multiple deck and axle configurations. 

Four months later, Catom’s first custom trailer was delivered: a six-axle raised rail trailer with a removable deck section. The design allowed Catom to install a beam insert or deck extension for longer, heavier equipment. Talbert also designed the trailer to go from six axles to seven or eight axles, which minimized the number of permits needed for traveling through other Midwestern states.

“We know Talbert trailers are built with high-quality, heavy-duty components,” Cathy said. “Having that along with specific features that are customized for our needs took our operation to another level.”

Catom could finally move some of the biggest pieces of equipment at the time in one load, which, as they predicted, saved time, hassle and money. Potential customers also took notice of Catom’s new capability, quickly moving them to the head of the pack of preferred companies.

“We started to receive opportunities to bid bigger projects,” Tom said. “Less than a year later, we needed a second custom Talbert trailer to keep up.”

The trailer may have been Catom’s second custom unit, but it was the company’s first 11-axle trailer. It also had a removable deck, jeep and stinger, which allowed heavier loads to be distributed more evenly. 


“That’s when we really thought we were going to town,” Tom said. “We were getting more and more big jobs because we were one of the few hauling companies that could accommodate the larger equipment, and having the two custom trailers really allowed us to serve these contractors quickly.”

Each trailer was basically several units in one. For example, Catom could install a beam insert onto the 11-axle trailer to haul a large excavator, then put in the flush deck and take off axles for moving a crusher or forklift. Catom could serve a wide range of clients with the custom trailers, which made for a healthy return on investment while providing a service that was ahead of the local competition. 

“We started using our Talbert custom trailers from day one and each unit has quickly paid for itself.”  

Built to Suit

Catom now owns and operates 30 custom Talbert trailers – 43 percent of its entire trailer fleet. This includes multiple lowboys ranging from 40-ton, 2-axle to 65-ton, 13-axle trailers as well as 40-ton Double Drop stretch trailers and sliding-axle tilt-bed trailers used for hauling smaller equipment. The latest model Talbert delivered, in July 2017, was a 13-axle unit custom designed to transport much heavier equipment than ever before. 

“Every inch of that trailer is built to our specs. We simply gave them the serial number of the Talbert trailer we wanted it compatible with, then sat down with their team to discuss details,” Tom said. “The process is like no other. Catom gets engineering, parts, quality control and sales all in one room so they really understand what we need – and what our customers need.” 

As equipment grew larger and became heavier over the years, the demand for trailers that could handle the equipment in one load increased dramatically. That’s when Tom and Cathy Stellman saw their modest trucking company experience significant growth and success, which they attribute to hard work and valuable partnerships.  (Photo Courtesy of Catom Trucking)

Catom isn’t about just making its customers happy, but its employees, as well. Stellman has “been in the trenches,” so to speak, and is familiar with what works. The company often looks to its drivers, too, for insight about what makes operations easier. 

“When we order Talbert trailers, we know what we are getting,” Cathy said. “If we need a 60-ton unit, we get a 60-ton unit, not a 60-ton-rated trailer that can’t really handle the load because of a weak neck. That’s one of the most impressive things about the Talbert trailers – the geometry of their goosenecks.”

Talbert pioneered the industry’s first mechanical removable gooseneck in 1947 and the first hydraulic removable gooseneck in 1962. The innovations revolutionized how equipment was loaded and hauled, making what was once time consuming and dangerous, quick and safe.

“What makes Catom successful? Plain and simple: When our customers have a need, we fulfill it and we fulfill it well,” Cathy said. “But, it couldn’t be done without suppliers like Talbert who mirror those same values. Any time our customers come to us with a special request, we’re meeting with Talbert to get it done.”

The road to success is never straight and can be sometimes difficult to navigate. But what makes that road to success achievable are the partners who are in it from start to finish. For Catom Trucking and its customers, that partner has been and still is Talbert Manufacturing.  

That partnership, coupled with hard work, keeps Catom Trucking growing both in terms of fleet and family ownership. Tina Stellman, Tom and Cathy’s daughter, has also contributed to the company’s growth since 1997 and shares with her parents the same passion for fulfilling customers’ needs. 

“We feel strongly about maintaining a family owned and operated business,” Cathy said. “As I step back from the business, I look forward to Tina continuing the great relationships, passion and customer commitment that has made Catom what it is today.”

Paving the Way for Success

When Charlie Swift started Southeast Asphalt and Maintenance LLC in 1996, his budget determined his equipment, and his equipment determined the jobs he could take. 

“Basically, I started out with the cheapest equipment I could get,” he said.  

For Swift, building an asphalt sealcoating and maintenance company from the bottom up meant getting things done on an extremely limited budget. Through the humble beginnings of his business, Swift quickly learned that when you rely on inexpensive, used equipment, you’re only as good as your worst piece – and that was anything but efficient. 

Since adding the DA-350 to the Southeast fleet, Swift has discovered a significant bidding advantage over many competitors. The dual applicator has made it possible to place lower bids, bid on a wider range of projects, and complete them in less time.

Early on, his equipment set the parameters for his potential. Projects took longer to complete, and he was only able to bid on small projects, such as parking lots for banks and other local businesses. Determined to keep finding work, Swift maximized the potential of his second-hand sealcoating equipment. 

“As I gained more experience, I kept getting better and better and saw my business growing busier and busier,” he said. 

Finally, Swift reached a tipping point.

“I was getting enough work that I could start upgrading equipment. It made it possible for us to handle larger jobs,” he said. 

The jobs continued to line up and Swift hasn’t looked back. It’s now been two decades and Southeast has expanded to have a national reach. Based in Knoxville, Tennessee, a majority of the company’s work is centered in the southeast, but knowing his equipment is up to the task, Swift isn’t afraid to bid large projects across the country.

A driving force behind Swift’s confidence to bid bigger jobs was the Neal Manufacturing Division of Blastcrete Equipment, LLC’s DA-350 Dual Applicator, purchased in 2014. It wasn’t the first time he had bought a Neal Manufacturing applicator, but it was the first one he purchased new. 

For Swift, it didn’t take spreadsheets or months of operation to see the value of his newest machine. The DA-350 dual applicator, equipped with a spray bar and even-flow squeegee, was quick to demonstrate its value, project after project. Prior to adding the DA-350 to his fleet, Southeast would take on large lots using a truck-mounted hand-spray applicator. With the new machine, some hand spraying is still required, but only around the edges. 

Once the prep is complete and the edges are sprayed, one person is able to drive the DA-350 to complete the remaining surface. Instead of three workers hand spraying with three tips, one employee can conquer the same area in a fraction of the time, cutting overall project time and freeing up the additional crew members to move on to other jobs. Swift said the dual machine makes quick work of large lots, helping him complete jobs that once took 10 to 12 hours in as few as four.  

After Southeast Asphalt purchased Neal Manufacturing’s dual applicator machine, which features a squeegee and spray bar, they quickly saw its value, project after project.
 

A Class of Its Own

Since adding the DA-350 to the Southeast fleet, Swift has discovered a significant bidding advantage over many competitors. The dual applicator has made it possible to place lower bids, bid on a wider range of projects, and complete them in less time. Swift also increased profits, estimating Southeast can earn 35 to 40 percent more each day using the new machine.

Swift pointed out that for many projects, similar productivity can be reached with other commercial ride-on sealing applicators, but to him, there are times when there’s no comparison. 

“The pump,” Swift said, “is the differentiating factor. Their pump is capable of handling more material and heavier material than any other pump I’ve used. The Neal Manufacturing pump is known for that. They don’t need as much maintenance or cleaning, either.”

The DA-350 uses the company’s heavy-duty aggregate pump, which achieves 100 gallons per minute. It also manages heavier sand loads. 

“Diaphragm pumps work great for a standard sand load of 2 to 4 percent, but some projects require a heavier sand load. That’s when I need the DA-350,” Swift said.

Swift will run a sand load of 4 percent up to 8 percent through the DA-350 without hesitation. His fleet of resurfacing applicators also includes machines equipped with diaphragm pumps. But when a project requires anything over 4 percent, he knows it will be going through the Neal Manufacturing pump.

Prior to adding the DA-350, Southeast Asphalt would take on large lots using a truck-mounted hand-spray applicator. With the new machine, some hand spraying is still required, but only around the edges. 

Good, Better, Best

Swift doesn’t hesitate to declare that Neal Manufacturing makes the most dependable and efficient asphalt resurfacing applicator he’s worked with. He also wasn’t shy about approaching the manufacturer when he had ideas for improvement. According to Swift, Neal Manufacturing engineers not only welcomed his input, but worked with him to develop custom improvements for his applicator. 

“It was easy,” Swift said. “When I worked with the engineer, he had some solutions and suggestions, as did I, and we came out with a great machine.” 

The most notable improvements were made to his machine’s hydraulics and switches, specifically, the hydraulic dump valve. On a standard DA-350, the dump valve is controlled by a toggle switch and manually operated with a foot pedal. Swift’s DA-350 features a modified hydraulic dump control. The custom control makes it possible for the operator to open and close the valve as fast as he or she wants. The modification also allows the operator to set and hold the valve at a desired rate without having to continually monitor the control. 

“With the standard foot pedal, if you want it open 20 percent, you have to manually hold it right there. With mine, I just open it up to the dump rate I want, let loose and it stays put. I don’t have to worry about holding a certain pressure, if I set it at 50 percent, it stays at 50 percent,” Swift said. “The feature helps simplify things for the operator, who already has a lot going on – driving the machine, dumping sealer, trying not to dump too much – this modification makes it much easier.”

Dual Threat Contractor

As a business owner, Swift has discovered numerous advantages to owning a DA-350 dual applicator, the most significant of which has been its ability to transform Southeast into a dual-threat contractor. The DA-350 combines a six-tip spray bar capable of spraying 11 feet combined with an 8-foot squeegee. The option of a riding squeegee unlocks an entirely new segment of the asphalt sealing and maintenance contracts.

Many contractors don’t invest in a riding squeegee applicator because it’s not necessary for most jobs, especially smaller ones. For Swift, the ability to tackle everything from local bank parking lots to massive distribution centers has been a game changer. 

“Eighty percent of contractors can’t offer the squeegee method unless they do it by hand. Having both on one riding machine puts you in a different category of contractors,” Swift explained. “We get invited to work for large distribution centers all over the country because of our capabilities. Contractors who don’t offer the ride-on squeegee method can’t bid those jobs.” 

Swift will still tell you that you’re only as good as your worst piece of equipment, but in recent years he’s been more concerned about reaching the full potential made possible by his best piece of equipment.

Technology Training on Workflow Helps Address the Need for New Workers

By Jeff Winke

It is a scary world out there for you construction contractors who struggle with tight deadlines, demands for regulatory-governed quality, better productivity, lower costs, more time in a day, and that ominous need for a competent workforce.

The Associated General Contractors of America (AGC) released a study of construction firms in the United States.A few key statistics included in their Workforce Shortage Report include:

  • Eight out of 10 construction firms cannot find sufficient qualified employees
  • 19 percent are investing in labor saving equipment and tools that require smarter workers
  • 82 percent believe that it will be more difficult to find qualified workers over the next 12 months

“As the U.S.-based construction workforce becomes increasingly thinly spread,” the AGC report stated, “owners and managers of construction firms will be required to approach the problem of labor shortage creatively, in order to convert these problems into opportunities. A key to overcoming the labor shortage, in the construction industry, is to invest in current employees to increase their skills, knowledge and abilities, as well as to support existing employees with labor-saving tools and equipment.”

Investing in existing employees has definite advantages, when compared to hiring new employees.

  • Current employees know how the company operates and manages its project sites. 
  • Current employees are a known entity. Managers know their strengths and weaknesses and may be better able to manage and lead them than new hires.
  • With new employees, there are start-up administrative costs, drug testing, equipment and safety training, and general acclimation to new managers, co-workers, and procedures. 
  • Current employees pose less risk. Studies have confirmed higher injury rates among workers who have been on the job for less than a year. Consider also that hiring new employees with less experience and then moving them quickly into the field to meet demands may create greater risk.

Clearly, on-going skills and technology training of existing employees can prove to be critical not only for retention but the success of the company.

“The penalty for not keeping current with technology is longer project timelines,” stated Ron Oberlander, Vice President, Global Professional Services, Topcon Positioning Group, Livermore, California. “Successful training focusses on the work process which yields greater efficiencies and better results.”

An Emphasis on Workflow

With the training emphasis on workflow, employees can develop a broader perspective on construction projects and all that goes into the tasks that culminate in their completion. The emphasis on work processes demonstrates a respect for the intelligence of employees and invites them to think in a partner role, which can strengthen their commitment to the job and the company.

“I’ve completed a couple of training programs conducted by Topcon and I am scheduled for another in the next six months,” said John Poirier, Project Manager with Warman Excavating & Trenching Ltd., Waldheim, Saskatchewan, Canada. “It is well worth the time; and the cost is inconsequential compared to what I learn. Unbelievable trainers, seasoned experts with 20 to 30 years of experience, are training me. They know the products, the market, and understand the workflow.”

“Technology changes too frequently,” said Oberlander.”When we host attendees – distributors and end users – at our training sessions we focus on workflows and how the key features of our products and systems improve the productivity and efficiency of end users.”

With the strong job economy today, it is sometimes difficult to find talent to fill open positions.A benefit of training and the power of easy-to-use technology means that contractors can hire less-skilled talent.They can either send them to instructor-led courses or put them through e-learning-based training.Either way, the knowledge and skills gap can be bridged.

Technology Evolution

Since every construction project is unique, and may require different technology and solutions, it is important – actually imperative – that workers at all experience levels engage in training regularly to remain up to date.

“Think about the advances in consumer technology such as the Apple iPhone,” Oberlander said, “The innovations and high-powered processors that upgrade the iPhone annually are being used in construction equipment. Look at the displays and systems inside of a new excavator, dozer, or other heavy equipment which now make them more productive to run and service; and in turn, makes the contractor more efficient and profitable.”

Oberlander went on to describe how GPS machine control has evolved during the past 20 years from little adoption of machine automation to a market where some machine manufacturers are integrating machine control technology direct from the technology-provider’s factory floor into their machines or even wiring heavy equipment so that they are capable of later adding aftermarket systems.Some government agencies are even specifying that contractors working on their projects must employ GPS machine control on their equipment.

An Investment in Training

Topcon Positioning Systems’ current project is an example of the interest and commitment to training occurring in the construction industry. The company is investing by building state-of-the-art training facilities in the United States, Italy, and Japan. 

The new 6-acre training facility in the U.S. is being constructed at the Topcon campus in Livermore, California, and will cover training for construction, geo positioning, and paving. Vertical construction and layout training will include a half-built building for real-world demonstrations. Two state-of-the-art classrooms will be included. The training facilities in Italy and Japan are being built to the same parameters.

“Since we focus heavily on workflow training, our training will mimic live applications that take place at a typical construction site,” Oberlander said. “The main difference is we can focus on the application and training without distractions of a contractor’s live jobsite. We always offer on-location training at the contractor’s jobsite or home office, but we believe that it is important to establish a baseline of education with a contained workflow at our training center.We also offer the students a tour of our manufacturing facility so they can see how the products they use are made.”

Construction contractors struggle with the need to keep up to date on the latest technology and trends that make their projects more efficient, while attracting and keeping a full workforce in a tight labor market. The answers may be found in training both existing employees and new inexperienced workers on labor-saving technologies with a focus on the work process which yields greater efficiencies and better results.

What do you tell others considering training? Poirier said: “Go for it. There is 100 percent benefit to training; otherwise you’re looking at your technology being the world’s most expensive paperweight. Training gave me knowledge and confidence to feel comfortable with the technology. I recently set up a new excavator using a system I had mounted on a different machine. It works great and would have cost me $42,000 to have someone come in and set up and initialize the GPS system on the excavator – all work I did myself.”

Clearly training can benefit contractors. It can add knowledge, skills, and the confidence to succeed.

Are You Making These Mud Mistakes?

By Jeri Lamerton, Principal and Consultant, Lamerton Strategic Communications

In the 1970’s, horizontal directional drilling (HDD) was a lot of trial and error. It was new territory, successful only because of the grit and determination of a few early pioneers. Today, the industry has had more than 40 years to perfect the process. Technological innovations have improved performance while decades of experience has led to best practices universally accepted by underground professionals. Why then, is drilling fluid still getting short-changed?

“I’m surprised at the number of operators who take chances with their jobs by ignoring best practices when it comes to mud,” says Joseph “Jody” Parrish, HDD Division Manager for ARB Underground in Lake Forest, California. “They’re taking big risks with their equipment and jobs.”

Parrish has 37 years of industry experience to back up his statement. He’s worked internationally, through some of the toughest conditions imaginable including an earthquake and the Artic in the winter. In 2009, he even headed up the longest underground bore project in Ecuador at the time.

ARB Underground in the Port of Los Angeles, California

“We don’t cut corners when it comes to drilling fluid,” he says. “It’s an easy way to manage risk.”

Like other HDD professionals, Parrish points out that drilling fluids help stabilize the borehole, suspend cuttings and carry them out of the hole much better than water alone. Without it, equipment can be damaged, boring efficiency is compromised, and the risk of frac-outs and other damage to the site is greatly increased. Unfortunately, the expense and perceived hassle of “doing it right” keeps some from following best practices. They routinely break four drilling fluid rules, perhaps not realizing the risks they are taking.

Designate a Mud Man

One common mistake HDD operators can make is not having a trained crewmember in charge of drilling fluid. It seems harmless to send a laborer to “top it off” when mud is running low, but this can actually sabotage your drilling progress.

In a typical bore, fluid returns are about 20 percent solids at any given point. Incorrectly mixed mud – that “topped off” by someone who doesn’t know what they are doing – runs a high risk of actually putting solids back into the hole, undoing any progress you’ve made. These additional solids can clog the annulus, wear out pump parts, cause a loss of torque, and causes an increase in torque and pullback pressures. This results in drill pipe getting stuck down hole and even lead to inadvertent returns. 

Have a Mud Engineer on Site

A mud engineer works hand-in-hand with a trained mud man. Often hired from a drilling fluid manufacturer, the mud engineer checks the fluid every hour or so, making sure the recycler is working correctly and the mud mix is still maximized for current conditions.

“A mud engineer knows the fluid,” says Wyo-Ben’s Tyson Smith, who has worked as a mud engineer on many of Parrish’s jobs. “We monitor the mud’s efficiency and make adjustments on-site so you can get the most performance out of your drill. For example, if an operator is experiencing a high amount of fluid loss, a mud engineer will know the correct polymer to add to the mix to solve the problem and keep the job running smoothly.”

Don’t Skimp on Your Mix

Some operators will “save money” by not using the proper fluid mix. For example, they skip adding soda ash to their make-up water. Soda ash lowers water’s hardness and increases its pH value to the levels needed for effective drilling fluid performance. Unfortunately, not adding soda ash to your water means you might need to use up to 50 percent more bentonite in your mix. With the cost of soda ash versus bentonite, this “money-saving” move actually costs more.

Costs can really add up when you “save money” by skipping other additives as well. Geotechnical conditions, not budgetary concerns, should always mandate what mix of drilling fluid to use. Without the proper mix, your equipment is working harder than it has to. This not only slows drilling, it increases the wear and tear on your tools and equipment, decreasing service life and causing breakdowns. 

“The maintenance costs, replacement costs, and job shut-down costs should be enough to get people to use the proper mix,” Parrish says. “You pay to add something like Uni-Drill to your mud, but you always get your money’s worth when you consider the costs of not using it.”

Parrish’s example – Uni-Drill – is a Wyo-Ben product that conditions drilling fluids to control fluid loss, prevent formation clays from swelling, and keep tools clean by preventing bit balling. The additive helps build viscosity and reduces drag and torque, helping your down-hole tools do their job more efficiently and effectively. 

Another ARB Underground project in Hermosa Beach, California

“Think of it as insurance,” Smith says, who cautions against using bentonite without the proper additives. “There are many great additives on the market for every condition you will encounter. Using the right product will increase the effectiveness of your fluid and save you money and heartache down the line.”

Don’t Overuse Your Mud

Some operators use mud far beyond its effectiveness. Reasons include the cost of disposal, the cost and hassle of mixing new mud and – to be honest – laziness. The problem is that when mud gets too heavy, it loses flow properties. This means you’re not getting cuttings back out of the hole like you should, which can lead to a variety of problems and delays including inadvertent returns. 

According to Parrish, 10 pounds is the rule at ARB Underground. Once the mud reaches this weight, they dispose of the mud and the on-site mud engineer determines the proper mix for a new batch. 

In the end, cutting corners simply doesn’t pay. With all that can go wrong on a jobsite, from equipment failure to hole collapses and more, “saving” on your mud can end up costing you instead. 

“I’ve heard that doing mud right is just too messy and expensive,” says Parrish. “But what’s really messy and expensive is having to tell the DOT you’ve buckled their highway because you didn’t have the right mix of drilling fluid. Think about it.”