Examining Formula One’s cost cap
Co-authored by Adam Leigh, Trainee Solicitor
In 2022, the Fédération Internationale de l'Automobile (the FIA) found Oracle Red Bull Racing (Red Bull) to be in breach of the 2021 FIA Formula One Financial Regulations (the Regulations) and in this blog we analyse how the Regulations operate in practice.
The Regulations introduced the first-ever set of financial rules governing FIA Formula One World Championship (the Championship) teams. The Regulations impose a cost cap on the spending of Formula One teams throughout a calendar year. Unlike financial regulation in other major sporting competitions such as UEFA’s Financial Fair Play rules in European football, the Formula One cost cap is a fixed figure. Article 2.3 of the Regulations initially set this figure as $145 million to cover the 21 races over the 2021 calendar year.1 This figure has since been reduced to $135 million.2 Article 2.3(a)(iii), however, allows teams to spend an additional $1.2 million per race for any additional race over the 21-race threshold, which means that the actual cost cap for the 2023 season is $137.4 million as the 2023 season comprises 23 races (noting that although the Emilia Romagna Grand Prix was cancelled, it was deemed to take place pursuant to Article 2.3 of the Regulations).3 Whilst it is expected that the cap will remain at this figure, Article 2.3 allows for the 2023 cost cap to be adjusted for ‘Indexation’, which is defined in the Regulations.4
Prior to the introduction of the cost cap, it was arguably becoming increasingly difficult for teams with lower budgets to compete in the Championship. The main factor in determining a Formula One team’s allocation of prize money is where that team finished in the Championship the season before. Therefore, it was often the same teams receiving the top prize allocations, which meant that their budgets usually remained the highest for the next year. For example, in 2019 the eventual champions, Mercedes, spent approximately $484 million across the year and received around $177 million in prize money.56 Eventual 10th place finishers Williams spent $141 million and received $60 million in prize money.78 In the following season, Mercedes once again finished in first place and Williams, once again, finished last. With this in mind, the cost cap was introduced to achieve the following key objectives:
(a) to promote the competitive balance of the Championship;
(b) to promote the sporting fairness of the Championship; and
(c) to ensure the long-term financial stability and sustainability of Formula One teams,
while preserving the unique technology and engineering challenge of Formula One.9
The Regulations contain a broad definition of what is included in the cost cap calculations, whereby anything which is not explicitly excluded is covered, and Article 3 of the Regulations provides a comprehensive list of the exclusions.10 Generally, the cap relates to a team’s spending that impacts the performance of the race car (excluding the engine, which is subject to a separate set of regulations). Perhaps the most notable excluded costs are the driver salaries and the salaries of the three highest-paid staff members.
With regard to procedural requirements, the Regulations impose yearly and half-yearly financial reporting obligations on Formula One teams. These accounts are reviewed by the ‘Cost Cap Administration’. The Cost Cap Administration is defined as “staff designated by the FIA from time to time to administer and monitor the operation of” the Regulations.1 The Cost Cap Administration has the power to investigate potential breaches of the Regulations and refer cases to the ‘Cost Cap Adjudication Panel’. As per Article 7.1 of the Regulations, the Cost Cap Adjudication Panel comprises of an independent panel of judges who determine cases of alleged breaches of the Regulations.12 Decisions of the Cost Cap Adjudication Panel may be appealed to the International Court of Appeal.
The categories of breach are set out into the following categories:
- A procedural breach: This category covers where a Formula One team breaches a procedural aspect of the Regulations, for example, by failing to submit interim/half-yearly reporting documentation by the reporting deadlines;
- Late submission or non-submission of full-year reporting documentation: This occurs when a Formula One team fails to submit full-year reporting documentation by the full-year reporting deadline;
- A minor overspend breach: This occurs when a Formula One team submits the relevant documentation and its spending for the year exceeds the cost cap by less than 5 per cent, or the Cost Cap Administration reach the conclusion that a Formula One team has exceeded the cost cap by less than 5 per cent; and
- A material overspend breach: This occurs when a Formula One team submits the relevant documentation and its spending for the year exceeds the cost cap by more than 5 per cent, or the Cost Cap Administration reach the conclusion that a Formula One team has exceeded the cost cap by less than 5 per cent.13
The sanctions for breaching the above categories vary from a public reprimand to exclusion from the Championship. In the first two years of the cost cap, we have seen three Formula One teams subject to a sanction. In 2022, the Cost Cap Administration found that Red Bull had exceeded the $145 million cost cap by 1.6 per cent. As a result, Red Bull entered into an accepted breach agreement (ABA), which reportedly included the following provisions:
- a $7 million fine to be paid within 30 days of the date on which the ABA was entered into;
- a 10 per cent reduction in Restricted Wind Tunnel Testing and Restricted Computational Fluid Dynamics (CFD);
- Red Bull to cover the costs incurred by the FIA’s Cost Cap Administration as part of its investigation; and
- Red Bull being subject to an automatic referral to the FIA’s Cost Cap Adjudication Panel if they fall into non-compliance with the ABA.14
There is some debate as to whether the sanctions imposed on Red Bull will have a sufficient impact on the team’s racing performance. At the time of writing, Max Verstappen and Sergio Pérez occupy the top two places in the standings, which would suggest that the financial punishments are unlikely to have a significant effect on Red Bull’s prospects. However, Formula One is a sport of fine margins, so it is very possible that the 10 per cent reduction in wind tunnel testing may have a negative impact as we approach the end of the season.
1. Article 2.3: fia_formula_1_financial_regulations_iss.12.pdf
3. Article 2.3(a)(iii): fia_formula_1_financial_regulations_iss.12.pdf
4. Appendix: fia_formula_1_financial_regulations_iss.12.pdf
5. What are the Budgets for F1 Teams Including Mercedes, Red Bull & Ferrari? - EssentiallySports
6. Ferrari reigns supreme as F1 prize money payments for 2019 are released (givemesport.com)
7. What are the Budgets for F1 Teams Including Mercedes, Red Bull & Ferrari? - EssentiallySports
8. Ferrari reigns supreme as F1 prize money payments for 2019 are released (givemesport.com)
9. fia_formula_1_financial_regulations_iss.12.pdf
10. fia_formula_1_financial_regulations_iss.12.pdf
11. Appendix: fia_formula_1_financial_regulations_iss.12.pdf
12. Article 7.1: fia_formula_1_financial_regulations_iss.12.pdf
13. Article 8: fia_formula_1_financial_regulations_iss.12.pdf