Mark out the course of the gully with short stakes and twine. Lay out the gully so it follows a slope to guide any water runoff in the desired direction.
Dig the gully trench to the desired width. Make the trench half as deep as it is wide. Slope the sides gently to give the gully a more natural look.
Line the interior of the gully with landscape fabric. Pull the edges of the fabric to the top edge of the gully and pin it down with U-shaped garden stakes. Space the stakes eight inches apart along both sides of the trench.
Mix concrete mortar mix with water in a 5-gallon bucket, following the mixing instructions on the package label.
Smooth a 2-inch layer of mortar inside the gully with a trowel, working in a small 18-by-18-inch square. Push the rocks into the mortar, arranging them as desired. Place larger rocks along the sides of the gully and smaller rocks down the middle. Continue mortaring and placing stones until the gully is complete.
Plant along the edges of the gully to minimize erosion and provide a more natural appearance. Alternatively, use small boulders to edge the gully and disguise the edge of the landscape fabric.