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F1 cost cap: What is it, what does it cover and more questions answered

A budget cap, and how effective it might or might not be, has been a hot topic in Formula 1 for quite some time

Starting next season that hypothetical situation will become a reality. A cost cap of $145 million is set to come into effect for 2021 with subsequent, yet to be agreed upon, reductions in subsequent seasons.

Spending limitations are traditionally quite alien to the cutting-edge world of F1 where teams are constantly striving for technological excellence but the need to protect the less wealthy smaller teams against the spiralling costs has become paramount.

How will the cost cap work?

Despite the rest of the 2021 regulation changes being pushed back to 2022 due to coronavirus, the cost cap will still come into effect next season.

Although a limit of $175m was agreed upon, recent negotiations look set to push it down to $145m as the disruption to the 2020 season puts increased financial pressure onto the teams.

The plan is then to reduce the limit in later seasons, although this is providing to be the sticking point in recent talks. There has been an as-yet agreed upon proposal that the cap will fall to $140m for 2022 and then remain at $135m until further review after 2024.

The cost cap only covers spending that is performance-related, therefore teams can spend much beyond that across its whole business. Among other things, the cap excludes:

Driver fees
The wages of the team's three highest paid personnel
Employee bonuses
Championship entry fees
Engine supply deal
Travel and hotels
Purchase of superlicences
Non-F1 activities

Initially the objective of the cost cap was to shrink the gulf between the wealthiest teams and the rest of the grid and create a leveller playing-field, counteracting the ballooning costs of recent decades. However in the light of the coronavirus crisis the cap has taken on a new significance in making F1 sustainable for the years to come.

As all ten teams face the realities of 2020 and beyond there is an increased emphasis on the fact that F1 must cut costs to survive. With the cost cap teams have the stability of knowing how much they will have to spend to be competitive.

How will the cost cap be measured and what happens if teams exceed it?

A Cost Cap Administration will monitor the teams' adherence to the cost cap and will be made up of leading experts in financial regulation in sports. A dummy run of the process will be implemented in 2020, although there will be no penalty for teams who exceed the spending limit.

From 2021 breaches of the cost cap, or late submittal of accounts, can be punished in a number of ways. For minor indiscretions financial penalties and reprimands will be used, with deduction of constructor or driver points, limitations on testing, race bans and a reduction of their cost cap all in the Cost Cap Administration's power.

The most serious penalty, which can be used for the most extreme breaches, is exclusion from the world championship.

Has F1 had a cost cap before?

Although it has arguably been needed for a while, F1 has never before seriously attempted to control spending in this way. A cost cap of $40m was proposed for 2010 but with the raft of big-budget manufacturer teams in F1 at the time it ultimately never came to fruition. It has historically been difficult to achieve agreement from the wealthier teams to give up that advantage.

It highlights a key question at the heart of F1's identity and forces the rule makers to bring into conflict the dual priorities of F1: competitiveness and cutting-edge technology. The larger teams are currently used to throwing as much money as they can on gaining themselves every extra thousandth of a second.

Equally in a series that is so technology based it has often been easier to control spending in other ways. The limit on number of engines and other parts that can be used across a season has been an attempt at cost-cutting, as has severely limiting the amount of testing that each team can conduct. The 2009-12 Concorde Agreement contained the Resource Restriction Agreement, which included tight controls on testing and team personnel curfews and restrictions and the effect of the strict limitation in the number of parts that could be used in a season dominated the conversation for much of the rest of the decade.

How much were teams spending in 2019?

The amount that the 10 F1 teams spent overall last season varies wildly from below the proposed cost cap to far above it. World champion Mercedes and runner-up Ferrari both spent over $400m across the board, suggesting serious cuts will have to be made in order to stay within the $145m budget for performance.

At the back of the grid, Haas and Williams shelled out closer to $150m across the year, putting them well within the limit once non-performance related costs have been deducted. By comparing the expenditure of the front versus the back of the grid, and appreciating the gulf between, it becomes clear why a cost cap has been proposed.

How much are F1 teams spending today compared to in the past?

There has been an undeniable upwards trend in the budgets of F1 teams. In 1980 Williams won the championship after spending $5.1m, which after factoring in inflation is about $11.9m in today's money - a far cry from today's average spend. By the time Williams won the title in 1992, twelve years later, the team had spent $48m in 1992 dollars.

In recent years, the costs of F1 have continued to spiral. By 2013 Red Bull was spending $300m to be victorious and already the top teams were spending $100m more than that to be successful by 2019.

Will the cost cap provide a more competitive grid?

In some ways the delay of the new technical regulations has increased the likelihood of the cost cap being effective. Rather than teams being able to spend as much as they want in 2020 to build their new car, they will now have to adhere to the cost cap while designing the new generation of machinery. In theory the closing of the financial gap should also mean the cars are much closer on track.

However money will continue to speak volumes. Many of the teams will not have the finances to reach the $145m limit and will continue to run at a disadvantage despite the cost cap. Wealthier teams will continue to be able to afford the best drivers and top team personnel.

There has also been concern that the cost cap system will not be infallible. Different teams have very different organisational systems and with so many expenses not included under the new financial regulations the Cost Cap Administration will have a challenge to ensure that teams are not exploiting loopholes in their quests for victory.

How have the teams reacted to the cost cap?

While it has been pretty much universally acknowledged that protecting smaller teams in these uncertain times is essential, there has been a variety of reactions to the proposals.

Ferrari team principal Mattia Binotto has been quite outspoken regarding the issue and has made it clear that Ferrari does not want to go lower than $145m. He has argued that there is a danger in moving too quickly into extreme cost-cutting, especially in terms of potentially thousands of jobs, a stance that Red Bull share.

In contrast many of the smaller teams feel that the cost cap does not go far enough. McLaren have stated that the only way to protect the whole grid is by reducing the limit to $100m and team principal Zac Brown has compared the dissenters to "a heavyweight that only wants to fight middleweights".

The FIA may be able to push through the proposed cost cap without agreement from all the teams however, as the introduction of a new 'safeguarding' clause means can that it can make changes with a majority of votes rather than needing unanimous consent from all the teams.

In order for this clause to come into effect the FIA must decide that the situation constitutes "exceptional circumstances" and that the proposed change is necessary for the survival of F1.

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