The Budget Cap

[VIVA GT]

I see on the Autosport website that Christian Horner is claiming that “Probably about seven of the teams probably need to miss the last four races to come within the cap this year, from the consensus that there has been up and down the paddock.

“It’s not just about the big teams now, it's teams in the middle of the field that are really struggling with the inflationary rate that we're seeing that could even get worse in the second half of the year..."
Whereas Alpine boss Otmar Szafnauer is dead against raising the cap and says that all the teams need to do is reduce the amount of money spent on development to help cover the increase in other costs.

I must admit that with all of the talk surrounding costs & the budget cap recently I had started to wonder what would happen towards the end of the season if a team was to suffer expensive accident damage and couldn't afford (within the cost cap) to carry out the repairs. Would they b able to call 'force majeur' (sp?) and not run the car or are they contractually obliged to attend & run at every Grand Prix?

[crmalcolm]

Originally Posted by VIVA GT

I see on the Autosport website that Christian Horner is claiming that [I]“Probably about seven of the teams probably need to miss the last four races to come within the cap this year, from the consensus that there has been up and down the paddock.

I wonder who he thinks the seven teams are?

If we assume 1-4 are Red Bull, Ferrari, Mercedes and McLaren (who have requested an inflationary adjustment). You can add Alpha Tauri to support the Red Bull position and Aston Martin have said they support an inflation adjustment.

Alfa Romeo, Alpine, Haas and Williams have all voted against the adjustment though.


Sanctions for breaking the cap are not precisely defined, but if the breach is serious a team could be disqualified from the championship.

[Richard C]

I don't discount the inflation topic. But at the same time, having to operate under a budget is a reality for nearly 100% of the people and businesses on this planet. It is not rocket science. But people (and businesses) make poor financial decisions every day. And some F1 teams might do the same.

Nothing prevents teams from spending all of their budget on hookers and blow (actually I think those are not covered by the budget cap ) and then crying that they are out of money late in the season. Look at who and who has not been bringing updates to races and how significant those updates are. I suspect teams like Williams, Haas, etc. might be in a better place as they have been used to living on pennies for years, while larger teams may have challenges to downsizing and not just falling back on "lets dig into our deep pockets" when they feel the need. The big teams are on a diet and they are now feeling some sugar withdrawal. Just put a lock on the kitchen door.

My general feeling is that those who are complaining the most now, have been on a fast and furious period of mid-season development (like the good ole days) and are looking at their balance sheet and are getting worried. I have no doubt they could make it to the end of the season. They would be idiots to not have run those numbers. But they probably don't like what the accountants are telling them. It probably looks like they may need to stop (or severely limit) development and tighten their belts. But the alternative is to whine and complain that they need more money.

Richard

[Adam43]

Sounds like it is working.

[Richard C]

Originally Posted by VIVA GT

I see on the Autosport website that Christian Horner is claiming that [I]“Probably about seven of the teams probably need to miss the last four races to come within the cap this year, from the consensus that there has been up and down the paddock.

And this would be fantastic! It would be interesting to see some new race winners for teams who were able to live within the budget.

Richard

[steve_r]

Freight rates have gone through the roof, and utilities and fuel of course increased a lot too. But as the guy from Alpine said (I cant remember where I read the actual quote) there is nothing stopping teams reducing other areas of their budget to cover such costs.

This might of course mean cuts to R&D and car upgrades - which in particular might not suit the teams fighting it out for the championship. I always take anything that Horner says with a pinch of salt. All team principals are self serving, but with him it seems more blatant than with others.

[BTCC frog]

I think his statement that ‘seven teams might have to miss races’ sort of undermines his argument, because that means three teams are going to stay within the budget cap perfectly and prove it is perfectly possible to run an F1 team within the budget cap. If these seven teams (and really it’s three teams) have spent too much money you’d have to say they have nobody to blame but themselves (although you would get more points from 18 races in a Red Bull than 22 races in a Haas).

In the future I would certainly not like to see teams skipping races to stay within a budget cap because it is worth it for the increased car performance from development on a regular basis, but in a one-off year it would be interesting and fairer than allowing a greater budget cap to advantage the teams that have made the mistake of spending too much. Not that I think it is particularly likely that any team will have to miss races to stay within the budget cap.

[thetool]

The budget cap is good in theory, but when you have 7.8% and rising inflation in the UK where a lot of the teams are based, and staff salaries (other than a few, specific exceptions) are included in the budget cap, then it makes things very difficult.

Changing the total size of the workforce is not the work of a few months, and in the short-term will probably cost significantly more than it would save. It's not realistic to expect Red Bull to lay-off design and engineering staff at a few months notice.

Add to that the fact that the increase in cost faced by the teams is likely far in excess of general inflation, due to their reliance on specific industries such as shipping and fuel which have seen enormous price increases over the last few years. General freight costs have doubled since this time last year.

[chillibowl]

Surely if inflation is a problem under a budget cap then it would have also been a problem under a no budget cap system right?

spending their way out of every problem would only serve to increase the divide between have and have not teams and imo that system already proved itself to be unsustainable.

That said, I’m down for dropping 4 races from the calendar!

[Peter Mallett]

Originally Posted by thetool

The budget cap is good in theory, but when you have 7.8% and rising inflation in the UK where a lot of the teams are based, and staff salaries (other than a few, specific exceptions) are included in the budget cap, then it makes things very difficult.

Changing the total size of the workforce is not the work of a few months, and in the short-term will probably cost significantly more than it would save. It's not realistic to expect Red Bull to lay-off design and engineering staff at a few months notice.

Add to that the fact that the increase in cost faced by the teams is likely far in excess of general inflation, due to their reliance on specific industries such as shipping and fuel which have seen enormous price increases over the last few years. General freight costs have doubled since this time last year.

This is the problem with trying to artificially control markets.

[Richard C]

Originally Posted by thetool

The budget cap is good in theory, but when you have 7.8% and rising inflation in the UK where a lot of the teams are based, and staff salaries (other than a few, specific exceptions) are included in the budget cap, then it makes things very difficult.

I can't speak for the UK, but here in the US, I don't think people are typically getting salary adjustments mid-year due to inflation. So the "employee pay" part is real year to year, but I don't see it mid-year. That is why I think year to year inflation adjustments do make sense.

Originally Posted by steve_r

Freight rates have gone through the roof, and utilities and fuel of course increased a lot too.

I need to dig into the FIA F1 financial regulations, but there is a lot of exclusions. For example cost of airfare and lodging for testing and races is excluded from the cap. Same goes to things like utilities for your factory, etc. What it not clear to me is who all pays for freight to/from races. I think the FOM manages that (DHL?) but I don't know if that is a fixed cost value that can be planned for or is variable over the duration of the season. I am sure someone here knows the details on how freight costs really works.

Richard

[steve_r]

Originally Posted by Richard Casto

I need to dig into the FIA F1 financial regulations, but there is a lot of exclusions. For example cost of airfare and lodging for testing and races is excluded from the cap. Same goes to things like utilities for your factory, etc. What it not clear to me is who all pays for freight to/from races. I think the FOM manages that (DHL?) but I don't know if that is a fixed cost value that can be planned for or is variable over the duration of the season. I am sure someone here knows the details on how freight costs really works.

Richard

Yeah - this is from 2019:

If it’s not a back-to-back race weekend, cars will be flown back to the teams’ factories to be repainted. Suspension and wiring is checked and replaced if needed and then the machinery is packed once again and driven to the airport. Ferrari, Toro Rosso and Sauber’s cargo will meet at a mainland European airport, while the British teams’ goods arrive at the East Midlands airport. From there, the crates are handed over to DHL, F1’s official logistics partner, and are loaded onto cargo planes which are chartered by FOM. The teams still have to pay for this service, though.

https://f1destinations.com/the-logistics-of-formula-1/

Not sure whether anything has changed since 2019. It's not something that I have thought about much before, even though I am tenuously linked to the shipping industry.

[thetool]

Originally Posted by Richard Casto

I can't speak for the UK, but here in the US, I don't think people are typically getting salary adjustments mid-year due to inflation. So the "employee pay" part is real year to year, but I don't see it mid-year. That is why I think year to year inflation adjustments do make sense.

I don't know how the F1 teams operate, but it is very typical for UK business to have a pay review for the beginning of the new financial year which is April.

[Richard C]

Originally Posted by thetool

I don't know how the F1 teams operate, but it is very typical for UK business to have a pay review for the beginning of the new financial year which is April.

So I can imagine some expected increased being planned for. Then it would be higher than anticipated inflation making it hard. But in the end, they should include some wiggle room in their budget.

I wonder if the economy was to go the other way, would team ask for the budgets to be reduced?

Richard

[chillibowl]

so a thought occurred to me which was how does a long term contract not already have a clause in it to mitigate the risk of inflation and/or rapid inflation to all involved parties? particularly an agreement negotiated/amended during covid where supply shortages and inflationary pressures were already on the horizon?

so i looked, and while this isnt from the rule book per say, according to this it does.

from the F1 web site:

There was a mechanism in the regulations which allows for an increase in the cap to take into account general cost inflation from 2024 onwards. This has been brought forward to apply in 2021-23, if inflation is running at over 3%.

https://www.formula1.com/en/latest/a...l4PyVZtUJ.html

from 2020 and while things may have changed, the need to have an inflation mechanism would not have changed...

so if the mechanism does exists then we will see budgets increased as a matter of course...that then begets the question about what is Horner on about this time?

is he just starting the conversation in order to help activate this clause of the budget cap?

or is he just looking to spend his way to the title? which if you have an abundance of money losing value in whatever bank account it is sitting in, that you are better off spending it today at 7.8% inflation and before it hits 10+% in the future (and the future in this case potentially being a few months from now) makes a lot of financial sense.

anyways and as always, games within games!

[Richard C]

It should also be noted that the cost cap has a ramp down built in. I think the 2022 budget cap is $140M and for 2023 it is $130M. And there is adjustments built in based upon number of races (it assumes 21) and inflation is also a factor.

Richard

[Akrapovic]

The budget cap is kinda meaningless when Red Bull can use Adrian Newey to develop an entire Hypercar and pretend they're entering Le Mans with it, heavily utilising ground effect technology, just before F1 regulations switch to ground effect.

There is absolutely no way Red Bull have been under the budget cap. If they miss races, it's their problem.

[Casper]

Originally Posted by Adam43

Sounds like it is working.

Exactly and it sounds like RB haven't got the budget headroom to keep adding upgrades in the latter part of the year as they are used to do doing. OR it could be that Mercedes getting on top of their aero problems and now able to start developing their car worries Horner because MB might now get between Ferrari and RB on the podium. It would take an act of God for either Mercedes driver to win the championship but their presence on the podium might change things. Horner has a record of lobbying in the press and often getting his way but then that is his job and he does it well. To strengthen his position he should name the teams under threat from the cap and others can can see if he is correct in his assertions. Somehow my view leans to him crying wolf but it should be an interesting debate.

[Richard C]

Quoting something I mentioned in the Spanish GP thread as it is relevant to a news item and keeps me from retyping it all! The context of the quote was reporting period (annually) for the team budgets and the penalties...

Originally Posted by Richard Casto

I believe that is correct. I suspect there was a compromise to not include examinations during the middle of the year (as teams would need to do ongoing and continues third party financial audits, etc. and that would be costly and distracting). So they just report out at the end of the year.

Breaches fit three categories:
* Procedural (paperwork errors, missing deadlines, etc.)
* Minor overspend (overspend of less than 5%)
* Material overspend (overspend of more then 5%)

Three categories of penalties are available:
* Financial penalty (pay an imposed penalty)
* Minor sporting penalty (reprimand, points, suspension, additional testing limits, reduction of cost caps, etc.)
* Material sporting penalty (similar to minor, but also includes more stringent options including exclusion from championship)

My take on this is that teams are given freedom on how and when to spend during the year, but they do have to provide records. As I have mentioned before, I can't see teams taking the risk of keeping two sets of books (one for F1 and one for governmental regulatory agencies) as that level of fraud creates risks beyond F1 penalties, but could generate real problems (jail time, loss of revenue, PR disaster, etc.)

It sounds like teams can get slaps on the wrists for paper work errors (i.e. delay in reporting, etc.), they could overspend by up to 5% and can "maybe" keep points, but it would be embarrassing as it would be public and if they go beyond 5%, depending upon how egregious, it might include a slew of serious penalties including being kicked out of F1. Why would anyone really try to do a significant overspend or try to perform financial fraud to hide evidence given how serious the penalty could be?

The F1 Financial Regulations spell this stuff out. https://www.fia.com/sites/default/fi...2022-02-18.pdf

https://www.motorsport.com/f1/news/w...each/10318067/

So Williams was late on some paperwork and received a public slap on the wrist for a procedural breach.


https://www.motorsport.com/f1/news/h...ires/10317063/

In the article above, there is two factions regarding adjusting the cost caps. Red Bull, Ferrari and Mercedes pushing for more money while everyone else says "no". I believe some teams are still operating UNDER the maximum for the cap. And those teams (not surprised) say they can do the season and the cap should not be increased. And that while the Ukraine war may not have been foreseen, inflation should not be a shock and is not an example of force majeure. Of which I fully agree with all of that. I frankly just think the large teams are having serious withdrawal symptoms and need to suck it up, while everyone else is mostly "business as usual"


https://www.motorsport.com/f1/news/w...ries/10315705/

If find the arguments in the article above ridiculous and I am sure Wolfe understands that if he is using "new" money to fund pay increases that this allows him to also spend more on new car development. I guess he will not call out that they can spend less on the car to pay the staff more. He is focusing on the "think of the people" angle. As if he has zero control.

I am not calling out Mercedes here as Red Bull has been just as ridiculous in their logic (i.e. missing races).

Some of the articles mention freight costs. I believe those are folded into the larger budget. I can imagine that if freight costs is considered to be volatile going forward that a separate (and capped) budget is called out for that and then that cap can float up/down as needed. And also potentially orchestrated by FOM. Such as they organize shipping and then bill the team. I think that is an area in which I could agree with some tweaks. But a variable freight cap works best for the teams that CAN operate above the current budgets. The other teams may not like this.

Richard

[Richard C]

Richard

[chillibowl]

in the case of Merc (who at this point are probably locked in for 3rd), do they need more money to spend on this season or do they want more money to spend on next season while including that spending as part of their current year budget?

RB and Ferrari are, in all likelihood, be battling to the end this year so could use something extra to fuel this years development to the end while Merc get to play a different game.

and arguably if inflation is only set to rise in the future, then spending money today (whether that is on staff, hours worked, materials, r&d etc) is cheaper then spending money tomorrow so the benefits of shifting development to 2023 while utilizing extra cash (if its allowed) in 2022 is a double advantage really.

the ability to play with ones funding in order to take advantage of timing/development cycles surely makes it more important that teams stick to the original budget framework imo.

[Richard C]

Originally Posted by chillibowl

in the case of Merc (who at this point are probably locked in for 3rd), do they need more money to spend on this season or do they want more money to spend on next season while including that spending as part of their current year budget?

I think the budget is based upon calendar year. So your 2022 budget would include (generally) R&D for your done (or mostly done) 2022 car, 2022 car development during season and R&D for your future 2023 car.

My guess is that Mercedes is complaining because the 2022 car was (is) a dog and they had to do more development on it than expected. And that may have meant shifting money from 2023 development to the 2022 car. Now they have a smaller 2023 development budget and are asking for money.

Originally Posted by chillibowl

RB and Ferrari are, in all likelihood, be battling to the end this year so could use something extra to fuel this years development to the end while Merc get to play a different game.

Probably. I assume RB and Ferrari have a similar quandary in that how much money do they rob from their 2023 budget to fund the 2022 development battle (trying to be first in championship). Answer? Ask for more money.

Originally Posted by chillibowl

and arguably if inflation is only set to rise in the future, then spending money today (whether that is on staff, hours worked, materials, r&d etc) is cheaper then spending money tomorrow so the benefits of shifting development to 2023 while utilizing extra cash (if its allowed) in 2022 is a double advantage really.

Makes sense.

Originally Posted by chillibowl

the ability to play with ones funding in order to take advantage of timing/development cycles surely makes it more important that teams stick to the original budget framework imo.

Agree.

I think the problem the big teams are facing is that the budget caps are hurting them. And frankly that is the goal. It is absolutely expected that they will do less than they did in prior seasons.

Richard

[Casper]

It is a totally different reality for all the teams, some could spend more to reach the cap but those who used to throw money at year long development can't get their tiny little minds around budgeting for a year of racing within the cap. I wonder if the bigger teams always had in mind to start complaining and never had any intention of trying to comply being the bullies within the sport that they are when it comes to stuff like this. It will be interesting to see how they deal with it if they don't get their own way and once again create that gap between the smaller teams and the big three. The expectation that they can get what they want by using the media shows how they operate if their internal lobbying has failed.

[Richard C]

https://www.motorsport.com/f1/news/h...ship/10318310/

Interesting article. A few interesting points

1. No real precedents for violation X results in punishment Y. So how much do team push the envelope is a good question (see below).
2. The big guns come out when you go beyond 5% overspend. But that is around $7M which is not small. So then how much do teams try to overspend but tickle the 5% limit?
3. What if a team overspends but wins a championship? If the financial reporting period is annual, do you overturn in January a championship that ended the prior November? The final numbers will not be reported until end of December.
4. There is a look back period. So you can be punished for cheating in prior seasons. Again, do you yank away a championship years later?

My guess. 2-3 teams will overspend by slightly less than 5%. For 5+% overspends, they are likely to yank constructor championships and leave driver championships alone, plus they will reduce the budget for the offending team in the current season (so cheat in 2022, have reduced budget in 2023... even if 2023 is underway). They (FIA) also probably pray they don't have to deal with this level of drama.

Richard

[Tourer]

Originally Posted by Richard Casto

https://www.motorsport.com/f1/news/h...ship/10318310/

Interesting article. A few interesting points

1. No real precedents for violation X results in punishment Y. So how much do team push the envelope is a good question (see below).
2. The big guns come out when you go beyond 5% overspend. But that is around $7M which is not small. So then how much do teams try to overspend but tickle the 5% limit?
3. What if a team overspends but wins a championship? If the financial reporting period is annual, do you overturn in January a championship that ended the prior November? The final numbers will not be reported until end of December.
4. There is a look back period. So you can be punished for cheating in prior seasons. Again, do you yank away a championship years later?

My guess. 2-3 teams will overspend by slightly less than 5%. For 5+% overspends, they are likely to yank constructor championships and leave driver championships alone, plus they will reduce the budget for the offending team in the current season (so cheat in 2022, have reduced budget in 2023... even if 2023 is underway). They (FIA) also probably pray they don't have to deal with this level of drama.

Richard

Definitely a good article. Must admit that I'm not a fan of spending caps, even though I understand the reason for their existence - my preference would be to manage costs with clever sporting and tech regs (but it is never easy).

Your 3rd point is well made but I think that it is worse than you suggest - Williams was just fined for not meeting an annual reporting date in March wasn't it? So appears that the full "books" aren't due to be provided until March or thereabouts, so that any titles would have an asterisk next to them until full accounting is done.

If, for example the FIA stipulated that titles wouldn't be taken away for spend cap breaches, then that would free up teams to overspend and cop a fine later.

Many unknowns in regard to how it will be policed and dealt with - really no way of knowing how it all might end up.