How F1’s budget cap “dry run” will work in 2020

2020 F1 season

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With Formula 1 intent on introducing a $175m budget cap under the 2021 Financial Regulations, the sport plans to use next season as a trial period in order to tweak the process and address any problems which may arise.

During a recent call with financial analysts, Formula 1 CEO Chase Carey addressed the crucial question of how a budget cap can be enforced. “There’s no reason [not] to head down a path,” he said, adding, “you can account for everything, what you really need to make sure is you have access to the right information to do the accounting, and that’s just about us being disciplined and firm about what we need.”

This will be tested next year, Carey confirmed, though as the budget cap will not officially come into force until 2021, teams will not face penalties for exceeding it.

“We’re going to use 2020, all the teams will participate in what I guess you could call effectively a ‘dry run’,” he explained.

“The cost cap won’t actually be enforced with consequences until 2021, but, in 2020, what we really are actually going to go through is shaking out the bugs of accounting for the costs.”

The relevant article of the draft regulations, a copy of which has been seen by RaceFans, makes provisions for what is called a ‘soft implementation’, and calls on ‘for teams to submit relevant paperwork as though the regulations were in power’.

The article further states: ‘No F1 team will be subject to any investigation, hearing or sanction in respect of noncompliance with these Financial Regulations’, and that ‘no F1 team will be subject to any investigation, hearing or sanction in respect of noncompliance with these Financial Regulations and the provisions of these Financial Regulations shall be read and construed accordingly.’

In short, next year all teams will be required to submit their financial documentation as though a budget cap were in force and undertake to be audited accordingly, but will not be punished for any breaches. Thus, although the likes of Ferrari and Mercedes are on track to spend in excess of $175m on performance-related activities during 2020, they will do so legally as the regulations proper kick in on 1 January 2021.

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The regulations provide for the following exceptions from the cost cap:

  • Directly attributable marketing, hospitality and heritage costs
  • Considerations to F1 drivers and parties connected to them
  • Considerations to three highest earning employees other than drivers
  • Capitalisation of cars, depreciation, finance costs, taxes and property costs
  • Costs attributable to non-racing activities such as administration
  • Flight/accommodation costs during competition or testing
  • Power unit development costs, and validation of fuels/oils

The teams, F1 or FIA may register a complaint about a suspected breach of the regulations, with the Cost Cap Administration grpup then empowered to investigate the allegations.

Adrian Newey, Monza, Red Bull, 2019
Top staff salaries won’t be capped
During the 2020 ‘dry run’ this process is expected to identify any possible hiccups and allow for ‘breaches’ to be investigated. This will effectively train the Cost Cap Adjudication Panel – comprising a group of six to 12 independent judges – who will ultimately be empowered to impose sanctions on teams and those individual team members responsible for breaches.

The list sanctions available to the CCAP ranges from fines and public reprimands through deduction of points in both championships to cost cap penalties such as a lower cap for a period of time to suspension or even permanent exclusion from the championship.

In addition to above, provision has been made under Article 11 for ‘new entrants who have been granted an FIA Super Licence for participation in the championship must comply with these Financial Regulations in respect of the full year reporting period ending on 31 December immediately prior to the first championship season in which such F1 team participates.’

Clearly, F1 and the FIA are absolutely determined to introduce and police the cost cap by ensuring that any vague areas are identified and rectified in advance of full implementation in 2021.

Will there still be hiccups? Indeed, for controlling costs in F1 is not only a complex undertaking, but an area that could have unintended consequences, but as the regulations mature so a stable framework will eventuate. Ultimately that is vastly preferable to the current situation, where an arms race prevails between two ‘haves’.

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Dieter Rencken
Dieter Rencken has held full FIA Formula 1 media accreditation since 2000, during which period he has reported from over 300 grands prix, plus...

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  • 26 comments on “How F1’s budget cap “dry run” will work in 2020”

    1. I wonder if the likes of Mercedes and Ferrari will look at the January 1 enforcement date, and simply spend most of 2020 on developing their 2021 car. I understand that teams usually finalise their main car concepts before the new year, but with the new budget cap in place, the teams with deep pockets won’t be able to rely on throwing money at a problem if they get the concept wrong. If those teams do indeed shift focus to 2021 early on, we may get a situation like 2013 where performance is basically locked in just a few races into the season (the mid-season tyre changes in 2013 did shake the order up slightly though).

      1. They’ll get their top staff a massive salary boost or maybe announce that their staff is leaving to work on another chassis builder and get the money through that way.

        1. You mean like Aldo Costa going to Dallara?

    2. Accounting World Championship will go to the rich teams and it will give them an even bigger advantage over the few remaining small teams.

      1. @darryn would you care to elaborate on your fears? I can’t really see how wealthy teams stand to benefit in a way that would widen the gap.

        As the article says, there’ll be plenty of flaws and loopholes and hence this “dry run”, but your reaction seems purely hysterical I have to say.

        1. @gongtong I believe an example would be if as a part of their Formula E effort Mercedes developed a new type of battery, they would be able to add it to their F1 car without the cost of developing the battery going against their F1 budget cap. This would be an advantage that the manufacturers have over the other teams.

          1. The way I see it, Mercedes FE team will have to be independent from F1 team. In that case, FE team is technically a supplier and will have to provide the battery to everyone under same conditions.

          2. Good point !
            From the beginning I do think, believe and feel that this cap cannot be policed.
            I don’t think that you can limit sporting effort.
            Would be much more interesting to first see the teams competing with more even budgets.

          3. @velocityboy – “Power unit development costs” are outside the scope of the budget cap (which targets constructors, not engine suppliers). So advancements in battery technology would by fair game, and Mercedes’ AMG powertrains division can legally spend money on R&D into it.

            I think a more nuanced example would be PU integration into the chassis. As a PU manufacturer, the four (Merc, Ferrari, Renault, Honda) can say that one of their dyno/bench tests for their PU is to test their engines in a car-like environment (surrounded by bodywork that captures heat, and fed air through an inlet), but might be able to iterate and develop an effective shape of engine cover on behalf of their constructor team under the guise of this testing.

            1. @phylyp yep that is a good way of seeing it, I do hope this dry run will catch things like that.

            2. Precisely why the dry run exists to see where we can tighten up in future. I get these examples and of course I recognise that teams will push the limits, however I don’t see that creative accountancy is ever going to close a 150 million dollar gap. Let alone widen it.

              The suggestion made (Accounting World Championship) is that we’re going to tune in on Sunday and hear nothing but discussions with bean counters over how they bypassed financial regs. Perhaps I’m wrong, but even if the competitive advantage is only partially tightened, we’re still going to have something more reassembling a proper sport than previously. Even if bean counting does become a (rather tedious) discussion point.

            3. @bosyber @phylyp @velocityboy

              Resembling *

              (Just a 15 minute editing window Keith? Pretty please?)

            4. To me, what you are saying here reads as very reasonable @gongtong

    3. Seems they are taking this seriously

    4. so the potential new teams have to spend NOW as much as they can to have any hope to be anyhow respectable in 2021. The problem is – there’s no regulations in place so they can really start to do it in terms of car design and so on

    5. The bigger teams have businesses outside of F1 that could, theoretically, be used to cover up development costs by doing some work outside of F1. @gongtong

    6. p.s. you see – we even don’t know what parts we have to make, how many autoclaves we will need, even how many m2 carbon fibre we will need, what size factory we have to have and all that, even we have the money and ambition. i say we but that can apply to any new willing entrant. . . and – are we truly wanted after all?

    7. What will be interesting in the future will be the timing of discovery of breaches.

      What we find in football codes over here is that breaches normally are not discovered until well into the next season (or even the season after that) as it takes quite a while for the forensic accounting work to be completed.

      If that happens in F1, how will the penalty be applied? Loss of points, reduction, fine etc for the “current” year, which may have no impact if the team is having a “bad” year in terms of competition, or do they take away the championship from the year in which the breach occurred.

      I’m glad they’re having a dry run, but suspect some harsh practicalities are going to make it difficult to monitor spending in the current year of competition.

      1. Good Point ! Might cause teams collapse unnecessarily, who legally would have earned some more WC points, if others would not have breached.

    8. In my opinion there are many ways to bypass budget cap that it’s pointless to impose it.

      1. What are those?

        1. Here are three off the top of my head. Perhaps some of these will be dealt with through the detailed regulations, but the point is that it’s quite quick to think of potential loopholes
          – recording staff as “admin” or “drivers” who aren’t really
          – making senior employees partners in the business to move the 4th/5th highest earners into the top-3 exemption
          – Flying more, because flight costs are exempt but other travel costs are not.

    9. The way I see the possible issues about budget gaps are not about where money comes and goes. Fia can at any time send their accounting commandos to check the books of any of these operations and unlike with taxes the fia can simply ask once and if you don’t play ball you are out of f1. With taxes you can fight long and hard in the courts and pay politicians to get more suitable laws for your operation.

      The danger of budget gap is directly this meddling the top teams have the power to do. As long as ferrari, merc and red bull have this special power of being in the strategy group they have the ability to make sure fia goes for the loosest definitions every time there is an issue. At the same time ferrari still has its veto which in this kind of environment becomes very strong tool to guide the rules towards.

      There is also the question of penalties. How exactly do you penalize a team that has overspent during the year and won the championship? How do you keep the sport safe if a car crashes out and the spares put the team over the budget?

      1. Well there is precedent of a team being excluded from the championship for hidden uncompetitive behavior, like McLaren in 2007.

    10. All this budget cap idea is crap.

      The only thing they will accomplish – is that teams (predominantly big teams) will find new corporation structures, which will allow to hide any amount of excessive spending. It will all be perfectly legal, and no one will be able to monitor and police it.

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