F1 cost cap explainer: What is the cost cap and are penalties coming?

FIA to announce findings on Wednesday

The Formula 1 racing world is bracing in advance of Wednesday, when the Fédération Internationale de l’Automobile (FIA) is set to announce the results of their review of each team’s 2021 financial data and provide certificates of compliance with financial regulations. Known as the “cost cap,” each racing team currently faces a spending limit of $145 million per season.

With the racing series in Singapore last week for the Singapore Grand Prix, speculation grew that FIA’s findings would include cost cap violations by two teams. Rumors are currently swirling that both Aston Martin and Red Bull — home of defending F1 champion Max Verstappen and Sergio Pérez, who won the Singapore Grand Prix — are going to be found in violation of the cost cap.

In advance of these findings, we should take a moment to discuss what the cost cap is, the regulations in place, and what could happen to teams found to be in violation.

What is the cost cap?

In an effort to make F1 a more competitive sport, and to level the playing field, FIA decided in 2021 to implement the sport’s first-ever cost cap. For those interested, you can read the full set of regulations here. As stated early in the regulations, the cost cap was implemented to “promote the competitive balance of the Championship, promote the sporting fairness of the Championship, and ensure the long-term financial stability and sustainability of the F1 teams.”

Much like the NFL’s salary cap, the cost cap works to restrict just how much teams can spend, but the list of exclusions from what is covered under the cost cap is long. The expenses tracked for cost cap purposes focus on race car developments, research, and improvements. Driver salaries, for example, are not considered part of the cost cap analysis. Other items such as marketing, travel, employee bonuses and the like are also excluded from analysis.

How are the cost cap regulations enforced?

With the creation of the sport’s first-ever cost cap, FIA created the Cost Cap Administration (CCA). Under the regulations, this body will “ ... monitor compliance with these Financial Regulations, investigate instances of suspected non-compliance, and take appropriate enforcement action in respect of any breaches of these Financial Regulations.”

In conjunction with the Cost Cap Administration body, the regulations allowed for the creation of the Cost Cap Adjudication Panel (CCAP). This group, composed of independent judges, will “ ... hear and determine cases of alleged breach of these Financial Regulations that are referred to it by the Cost Cap Administration, in accordance with these Financial Regulations.”

Decisions from the CCAP can be appealed.

The process begins, however, with the requirements of each team to “ ... demonstrate its ongoing compliance with the Cost Cap by submitting Reporting Documentation in respect of its Reporting Group to the Cost Cap Administration by the Reporting Deadline in respect of each Reporting Period and by providing any further information requested from time to time by the Cost Cap Administration.”

These reports were submitted back in March, and Wednesday is when the Cost Cap Administration is expected to provide certificates of compliance.

What are the kinds of violations?

Under the cost cap regulations, there are four different tiers of violations. The most minor category of violation is what is titled a Procedural Breach. This is not a financial violation by the team, but rather a mistake under the regulations, such as a late submission, a failure to file interim reports as requested by the CCA, a failure to cooperate with requests from the CCA, or other non-financial violations.

A second kind of violation is similar to the Procedural Breach, but carries a bit more risk to the teams. This is a Late and Non-Submission of Full Year Reporting Documentation violation, which occurs when a team submits their requisite full year report late. If a team does not file the required full year report on time, they will receive notice from the CCA and will be given 48 hours to explain the submission. Depending on the explanation, the CCA can either extend the submission deadline, or find that the team has committed a Non-Submission Breach.

The next two categories are where the focus is at the moment.

The third category is titled a Minor Overspend Breach. This occurs when a team is found to have exceeded the cost cap by less than 5%. This can be found either in the team’s own submission, or following an investigation and audit, and in either situation a violation of less than 5% is considered a Minor Overspend Breach. (Meaning that the penalties are not increased if a team’s own submission is found to have complied with the cost cap, but further investigation and analysis by the CCA finds spending over the cost cap by less than 5%).

The fourth, and most severe, category of breach is a Material Overspend Breach. This violation is found when a team exceeds the cost cap by more than 5% or more. As with the Minor Overspend Breach, the findings are the same whether incorporated in the team’s initial report, or found later after investigation and/or audit.

What are the potential penalties?

Under the cost cap regulations, the potential penalties vary depending on the kind of violation found.

Teams found to have committed a Procedural Breach shall face a financial penalty, with two potential exceptions. If the CCAP finds that mitigating factors exist to justify no further action, then a financial penalty may be waived. Conversely, if the CCAP finds that aggravating factors exist, then a Minor Sporting Penalty may be levied against the team. More on that in a second.

Teams found to have committed a Non-Submission Breach face a deduction of Constructors’ Championship points. Further, teams found to have committed such a violation face potential financial penalties, as well as a potential Material Sporting Penalty.

Teams found to have committed a Minor Overspend Breach face a potential financial penalty, as well as a potential Minor Sporting Penalty.

For those teams found to have committed a Material Overspend Breach face a deduction of Constructors’ Championship points. Further, teams found to have committed such a violation face potential financial penalties, as well as a potential Material Sporting Penalty.

With all of these violations, potential mitigating or aggravating factors are to be considered when levying a penalty.

What are potential mitigating or aggravating factors?

When analyzing potential penalties, the CCAP will analyze the situation for potential mitigating or aggravating factors. These may weigh in favor of reducing potential penalties, or increasing potential penalties.

The regulations list the following examples of mitigating factors: Voluntary disclosure of breaches; a long track record of compliance with the cost cap regulations; unforeseen Force Majeure events (external and unforeseen events which made compliance impossible); and/or “full and un-fettered cooperation” with investigations and audits.

Then there are potential aggravating factors to consider. In the regulations, these are listed as: Any element of bad faith, dishonesty, willful concealment or fraud; multiple breaches of the cost cap; failure to cooperate with the CCA or any independent audit; among other potential factors to consider.

Enough with this legal mumbo jumbo. What could the penalties be?

Focusing on the final two types of violations, as those are the types of violations that could be uncovered soon, here is how the regulations define both a Minor Sporting Penalty and a Material Sporting Penalty.

Minor Sporting Penalties include the following potential sanctions under the regulations:

• (i) public reprimand;
• (ii) deduction of Constructors’ Championship points awarded for the Championship that took place within the Reporting Period of the breach;
• (iii) deduction of Drivers’ Championship points awarded for the Championship that took place within the Reporting Period of the breach;
• (iv) suspension from one or more stages of a Competition or Competitions, excluding for the avoidance of doubt the race itself;
• (v) limitations on ability to conduct aerodynamic or other Testing; and/or
• (vi) reduction of the Cost Cap

The regulations include the following Material Sporting Penalties:

• (i) deduction of Constructors’ Championship points awarded for the Championship that took place within the Reporting Period of the breach;
• (ii) deduction of Drivers’ Championship points awarded for the Championship that took place within the Reporting Period of the breach;
• (iii) suspension from one or more stages of a Competition or Competitions, excluding for the avoidance of doubt the race itself;
• (iv) limitations on the ability to conduct aerodynamic or other Testing;
• (v) suspension from an entire Competition or Competitions, including for the avoidance of doubt the race itself;
• (vi) exclusion from the Championship; or
• (vii) reduction of the Cost Cap

What could this mean for drivers and teams?

As you can see, the potential penalties vary depending on the level and extent of the breach, and then an analysis of any potential mitigating or aggravating factors.

Reporting and rumors indicate anything from at least one team being in minor violation to potentially one team having committed a Material Overspend Breach. As noted in this piece from Sky Sports, reports of Red Bull having significantly overspent circulated throughout Italian media over the past week. That led to Ferrari arguing for severe penalties, as Ferrari sporting director Laurent Mekies declaring it would be “game over” for F1 if any penalties were not severe.

Mercedes Team Principal Toto Wolff had this to say last week regarding potential penalties, telling Sky Sports the following: “All of us have been investigated diligently and, as far as we understand, there is a team is in minor breach, which is more procedural, and another team that is fundamentally massively over and that is still being looked after. That is an open secret in the paddock.”

That leads us to a potential scenario for Verstappen and Red Bull. Verstappen edged out Lewis Hamilton by just eight points last year for the Championship. A violation leading to a point deduction could close that gap ... or more.

Then there is this season to consider. If Red Bull committed a Material Overspend Breach, there are potential penalties that would impact the team this season, such as “suspension from an entire Competition or Competitions, including for the avoidance of doubt the race itself,” or “exclusion from the Championship.”

Now, these all seem rather severe, and Red Bull has fired back at all the rumors and reports over the past few days. Red Bull Team Principal Christian Horner described the comments from Ferrari and Mercedes as “defamatory,” and described himself and the rest of Red Bull as surprised by the reporting. “We were a little bit taken aback by comments that were coming from two of our rival teams yesterday.”

Horner went on to say: “The submission between the team and the FIA is one that is confidential. I have no idea what the outcome of our rivals’ submissions are, or their accounting treatment or so on, so I would be intrigued to know where their source of information for these fictitious claims have come from.” He added that Red Bull was “looking at what options” are available to them, hinting at potential legal action.

What will put an end to the speculation and commentary?

The findings from FIA.

Which we should get soon.