The introduction of the cost cap in Formula 1 has allowed teams to do something they aren’t exactly well known to do: turning a profit. F1 teams suddenly had a business case that made sense for the first time since the inception of the sport and instantly saw their valuations skyrocket. It has also meant that the bigger F1 outfits have had to downsize to fit the cost cap, which led to a couple of interesting side effects1.

In retrospect, the introduction of the cost cap in 2021 was surprisingly smooth. I can’t really recall any budget cap dramas from that season2, other than the fact that both RedBull and Mercedes had to carefully manage how many resources they were putting into the title fight, while not compromising their 2022 challengers.

In 2022, however, due to enormous amounts of inflation and spiraling freight costs3, multiple F1 teams have declared that meeting the cost cap was going to be impossible. Christian Horner even went on record saying that multiple F1 teams would have to miss races4. At the middle point of the season, and after a lot of back and forth between the bigger teams, the smaller teams, and the FIA, the cost cap was raised by 3.1%. Time will tell if this fix will diffuse the threat of widespread cost cap breaches across the grid.

The F1 cost cap: some key details Link to heading

The cost cap was originally envisioned with an upper limit of \$175m. However, when the Covid-19 pandemic struck the world, the decision was made to lower the cap by \$30m to protect F1 teams from going bankrupt. The cost cap is also meant to drop \$5m per year in the following two years, meaning that in 2021 the cap was \$145m, dropping to \$140m in 2022 and \$135m from 2023 onwards. Yearly inflation and the number of races in the calendar have an impact on the final number that teams have to adhere to.

What are the penalties for breaching the cost cap? Link to heading

The penalties used to punish cost cap breaches depend on the kind of breach that was done. There are three kinds of breaches:

  • Procedural breach: submitting paperwork late, etc.
  • Minor overspend breach: exceeding the cap by less than 5%.
  • Material overspend breach: exceeding the cap by more than 5%.

Unfortunately, we don’t know what exact penalties would be dished out for a 4% cost cap infringement when compared to a 2% infringement or even a 7% infringement because individual breaches are assessed on a case-by-case basis. This is where I feel the cost cap regulations have gone wrong. We F1 fans don’t know what happens if the cost cap is breached and, by the way they’re behaving, neither do the teams5.

Let’s reimagine the cost cap penalties Link to heading

The NFL’s salary cap is only implemented as a hard cap because they have a very straightforward way to police it: every player contract has to be approved by the NFL, which means that the NFL can verify if a contract will push a team’s budget over the salary cap. In F1 this isn’t feasible because any given F1 team employs hundreds of people, and the vast majority of them directly contribute to the team’s performance. It’s also important to mention that both freight costs and raw material costs can vary unpredictably, making implementing a hard cap in F1 a fool’s errand. In some ways, it would be more correct to say that F1 teams are boutique car manufacturers that only produce 2 cars per year6.

Given how sensitive F1 budgets are to outside factors, I feel that an NBA-style soft cap would be much better suited to the pinnacle of motorsport. F1 teams shouldn’t be scared of going above the cost cap but they should be heavily discouraged from doing so. What penalties would you implement in order to make a soft cap work? I present my ideas below.

Proposal 1: A new take on NBA’s luxury tax Link to heading

For every dollar you spend above the cost cap, you must pay a dollar to each of the other teams in the championship.

This rule is designed to be quite savage (any breach is punished ninefold), but also rather elegant: let’s see why.

Let’s say that Ferrari is the only team that overshoots the cap and they do it by \$5m. Ferrari would have to pay \$5m to each of the other 9 teams in the F1 championship, amounting to a total of \$45m! This scenario is very unrealistic, however, so let’s assume that Mercedes and RedBull are also overshooting the cap by \$5m: now, in this case, Ferrari would still pay \$45m but would get \$10m back, meaning that their net loss is \$35m (same goes for RedBull and Mercedes). The other 7 teams would get \$15m from the top 3 teams. That’s the beauty of this rule: if a lot of teams breach the cost cap in the same season, the “net penalty” actually lowers (quite useful if all the teams are financially struck by outside factors at the same time).

Let’s take a look at a cost cap situation inspired by the 2022 drama and how this rule would apply.

F1 team Cost cap breach ($m) Penalty payment ($m) Penalty income ($m) Net income ($m)
RedBull 8 -72 23 -49
Ferrari 7 -63 24 -39
Mercedes 7 -63 24 -39
McLaren 4 -36 27 -9
Alpine 3 -27 28 1
Alfa Romeo 0 0 31 31
Haas 0 0 31 31
Alphatauri 0 0 31 31
Aston Martin 2 -18 29 11
Williams 0 0 31 31

Rather surprisingly, Alpine and Aston Martin managed to be net positive, despite breaching the cost cap. Meanwhile, Williams and a couple other backmarkers are flying first class with a \$31m blank check. The most curious case is definitely RedBull, which is in this weird situation where they lose \$49m with the main team and gain \$31m with their junior team (an overall \$18m net loss).

Proposal 2: CFD and wind tunnel restrictions Link to heading

For every \$20k you spend above the cost cap, you lose one CFD run.

For every \$120k you spend above the cost cap, you lose one wind tunnel run.

This sort of penalty is already a possibility in the current cost cap regulations, so what I’m doing here is simply regulating how big of a penalty you get. They also would only apply for the first half of the following season, but there’s no reason it couldn’t be rephrased so that it impacts a team’s wind tunnel and CFD restrictions for the entirety of next season. Let’s reuse the example from the previous proposal and let’s assume that these are the current constructors standings:

F1 team Cost cap breach ($m) Wind tunnel runs After penalty CFD runs After penalty
RedBull 8 224 157 (-67) 1400 1000 (-400)
Ferrari 7 240 182 (-58) 1500 1150 (-350)
Mercedes 7 256 198 (-58) 1600 1250 (-350)
McLaren 4 272 239 (-33) 1700 1500 (-200)
Alpine 3 288 263 (-25) 1800 1650 (-150)
Alfa Romeo 0 304 304 (-0) 1900 1900 (-0)
Haas 0 320 320 (-0) 2000 2000 (-0)
Alphatauri 0 336 336 (-0) 2100 2100 (-0)
Aston Martin 2 352 335 (-17) 2200 2100 (-100)
Williams 0 368 368 (-0) 2300 2300 (-0)

The rich get poorer and the poor get richer. RedBull, for example, gets the double whammy of leading both the championship and the cost cap breaches, meaning that they would head into next season with a severe developmental handicap when compared to their rivals and the midfield.

Proposal 3: Lower the cost cap for next year Link to heading

If you exceed the cost cap by x dollars, your next year’s cost cap will be lowered by x*0.5 dollars.

If you really want to stamp out repeat cost cap infringements, then this is your nuclear option, especially if it’s paired up with proposals 1 & 2.

Something to think about Link to heading

Ultimately, the exact numbers of the penalties don’t really matter. They can always be tweaked (but be careful with how soft you want your soft cap to actually be).

In the end, what ultimately matters are the core ideas behind each proposal. Hopefully, they gave you something to think about, when it comes to cost caps.

  1. The introduction of the cost cap left some F1 teams with interesting decisions to make: what to do with all these resources and personnel that, due to the cost cap, can not be allocated to F1? Mercedes ended up expanding their applied science division, RedBull took a page from McLaren’s book and is now building a hypercar (and their own F1 engine department, for good measure). Meanwhile, Ferrari is entering WEC with a bespoke racer and McLaren is entering every top-level racing series under the sun. ↩︎

  2. Probably because Hamilton and Verstappen were too busy hitting each other with steel chairs. ↩︎

  3. Russia was a major player in the air freight business, something that F1 is heavily reliant on due to their tight schedules. ↩︎

  4. He later said that he was exaggerating. Let’s be real: there’s no way F1 sponsors don’t have a “you have to attend all the races” clause or something similar. It would probably be cheaper for RedBull to breach the cost cap, instead of breaching sponsor contracts. ↩︎

  5. Look, I’m sure the teams have a pretty good idea of what happens if they go over budget, but none of them wants to be the first to find out exactly what happens. ↩︎

  6. McLaren took this metaphor to the next level, that’s for sure. ↩︎