The Cost Cap on Formula 1 teams

Lights out and away it goes, the Formula One Championship is back on track. Last year Formula One was the most watched ever season in the United States amounting to 1.21M viewers per race, an increase probably due to the new races implemented in the calendar year taking place in American territory: Miami, as an example. This year the urban circuit of Vegas created ex profeso for the event will be also on the calendar of the Formula One competition, raising to 23 the number of races on the calendar.

With the new season just starting, it is a good occasion to refresh some information on one of the newest elements that were inserted in the competition rules. After two years of application, the Cost Cap still is a novelty for most European-based sports. As a matter of fact, regulations concerning limiting the expenditure of teams and/or clubs in team sports are characteristic of United States sports. This will be the second season that teams will be subject to Financial Regulations, and this is an approach to how it works.

1. The purpose of the Cost Cap

Not only the influence of American owners in the competition was the reason behind these regulations, but also the need to regain the competitive balance within the competition so that more teams could win more races created the need to establish a mechanism by which the conditions of competition are more equal. Those are the underlying reasons behind the implementation of the Cost Cap. Over the last ten seasons, only two teams have been able to win the World Constructor Championship, a dominance that is good for the fans of a team but doesn’t promote the evolution of the sport.

2. How it works

The Cost Cap, unlike in other sports where it is calculated as a percentage of the revenues, and therefore, varies from team to team, is a firm and robust figure which for the current season is $135 million. This is $5 million less than what teams were allowed to spend over last season. Nonetheless, the regulations were issued considering the calendar year of 21 races. Taking into account that the final version of the F1 2023 Season calendar has 23 races, $1,2M more per race should be added to the Cost Cap. This calculation would establish a final Cost Cap of $137,4 million.

The way the Cost Cap works is that the Costs which the teams have incurred must first deduct the Excluded Costs. There is a whole list of 24 elements that can be excluded, some of them are the salary of the drivers and the top 3 highest earning members of the team personnel, marketing activities, travel, or financial penalties. The regulations wrap it up by establishing that any cost that is directly attributable to: marketing, heritage asset, non-f1 activities, HR, Finance, or legal activities get excluded.

The third step is the adjustments. This means that some costs have to be counted differently. An example of one of those adjustments:

Once the costs have been calculated, those costs which have to be excluded and adjusted are deducted, and the final result of that calculation is compared to the Cost Cap. If the result is that the costs are greater than the Cost Cap, then the team had exceeded this limit and there is a breach.

3. Breaching the rules and sanctions; procedures

Unlike in other sports, the FIA has created two categories: when the exceeding costs are below a 5% of the Cost Cap, it is considered a Minor Overspend Breach; if there is a breach on the costs which is 5% or over the Cost Cap, it is considered a Material Overspend Breach. There are also two other penalties to ensure that teams comply with their reporting obligations this is the Procedural Breach and the Late or Non-reporting of Full Year Reporting Documentation. Whereas the first one refers to actions such as: making a Late Submission or failing to provide additional information to the Cost Cap authorities; the latter refers to the cases in which the team didn’t submit the information on the deadline the documentation, and has failed to provide any reasoning in due time as to why there is a delay in sending the information.

For each type of breach, the regulation establishes a different sanction:

  • Minor Overspend Breach: Financial Penalty and/or any Minor Sporting Penalties
  • Material Overspend Breach: “Constructors’ Championship points deduction in accordance with Article 9.1(c)(i) and additionally may impose a Financial Penalty and/or any other Material Sporting Penalties.”
  • Procedural breach: Financial penalty. Nonetheless, there may be mitigating factors that can “erase” the sanction; or aggravating circumstances that could add a “Minor Sporting Penalty in addition to the Financial Penalty, or in lieu of the Financial Penalty.”
  • Late and Non-Submission of Full Year Reporting Documentation: “Constructors’ Championship points deduction in accordance with Article 9.1(c)(i) and additionally may impose a Financial Penalty and/or any other Material Sporting Penalties.”

As described above there are three possible sanctions: financial penalties, Minor sporting penalties, and Material sporting penalties.

  • Financial penalties: the regulations do not limit nor establish in what range can a financial penalty be imposed.
  • Minor sporting sanctions: there are several sanctions included under this category: from a reprimand to limiting the time of aerodynamics, and testing. Under this category, there can also be point deduction and suspension from racing, or even limiting the Cost Cap.
  • Material sporting sanctions: This category includes most of the sanctions which are also considered minor sporting sanctions: point deduction, suspension from races or limitations to aerodynamics and testing, limiting the Cost Cap. The major difference is that this category includes the suspension from the entire competition and the exclusion from a Championship.

Finally, regarding the procedure, the FIA has created a specific body: the Cost Cap Administration to deal with the logistics of the regulations and the Cost Cap Adjudication Panel to deal with any cases of possible infringement of the regulations.

If the Administration body finds that a team has failed to comply with the rules being a: Minor Overspend Breach or due to a Procedural Breach, the parties, team, and Cost Cap Administration body, may reach an Accepted Breach Agreement. This means that the team recognizes the breach, and accepts the imposition of certain obligations, financial penalties, or minor sporting penalties. The acceptance of this agreement waives the possibility of appeals to the decision.

When the issue is either a Material Overspend Breach or the Late and Non-Submission of the Full Year Reporting, or, when there is a breach of the abovementioned infringements and no agreement has been reached, or even, when there is a breach of the Agreement, the issue is raised to the Cost Cap Adjudication Panel. The Panel acts as a proper disciplinary panel where the parties will be allowed to be heard and the Panel, composed of judges, will take a final decision. If the team is found to have breached the rules, it will be sanctioned in accordance with the severity of the breach, and the criterion of the Panel. These decisions are only appealable to the International Court of Arbitration, the appeals court of the FIA.

4. Three cases: Red Bull, Aston Martin and WIlliams

Throughout the last season, three teams were found to be in breach of financial regulations. Given that it was either a procedural issue or a minor overspending breach, they all engaged in an Accepted Breach Agreement with the FIA.

Williams Grand Prix Engineering (19th May 2022) – Williams Racing was found to have failed to submit the Full Year documentation on the deadline day. When asked by the FIA what was the reason for it, the Team alleged that it had warned the FIA prior to deadline day that it would incur that issue, and the Cost Cap offered an Accepted Breach Agreement. They were obliged to remedy the breach -give the Full Year Report no later than May 31st and pay a $25,000 fine with all the costs derived from the preparation of the Agreement.

Aston Martin Racing GP (25th October 2022) – The issue with Aston Martin was also a procedural breach because it failed to accurately calculate an excluded or adjust a cost in determining the calculation of the Costs: most of them were related to the new HQ the Team is building in Silverstone. The Agreement includes the following: concerning the cost of the new F1 team headquarters, or the new F1 simulator. It also includes other costs: concerning the cost of desks and chairs or the cost of catering services provided to personnel at its factory headquarters.

Considering that the Costs did not go over the Cost Cap, Aston Martin cooperated with the Administration body, it acted in good faith, there was no gain or advantage in the exclusion of a cost, and the rules were only operative for the first time during that season, the FIA considered to offer an Accepted Breach Agreement as the best solution. This included a financial penalty of $450,000 plus the costs of preparation of the Agreement.

Red Bull Racing F1 Team (26th October 2022) – Red Bull filed all the necessary documentation in due time. The Team presented that the total costs amounted to £114,293,000. When examining the calculations the Administration body reached the same conclusion as with the Aston Martin team, some costs had been inaccurately excluded or adjusted, and with the appropriate calculation, the total cost of the Team would have been £118,036,000. This calculation meant that the team had committed a Minor overspending breach of 1,6%, below the 5% threshold.

Some of the costs which were not duly calculated referred to catering services, social security bonuses and contributions of employees, or travel costs, and most especially emphasized that if Red Bull had done the correct calculation of the cost derived from the National Tax Credit the overspend would have been of 0,37%. Therefore, acknowledging the same as in the Aston Martin case: first year of the rules and good faith and collaboration with the FIA, accepting the breach the parties settled the agreement in the following.

The Team was imposed a fine of $7,000,000, and a Minor sporting sanction by which the team reduced their aerodynamic testing time with a 10% cut over the total available time, which is already subject to the final position of Red Bull in the Constructors’ Championship. Considering that Red Bull finished in 1st place, the FIA Formula 1 Sporting Regulations award them 70% of the available time, applying the sanction imposed for the breach Red Bull will get only a 63% of the time.

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