How F1 budget cap works – and why Red Bull are unlikely to lose their title

There has been a lot of debate over Formula One’s budget cap over the past few days, following reports alleging that two teams have broken 2021’s $145 million [£114 million] limit – one in a “minor” way and one in a “major” way.

Red Bull’s Christian Horner and Mercedes’ Toto Wolff had a back and forth on this topic in Singapore with Horner threatening legal action after comments made by the Austrian. But what is the budget cap’s purpose? How much of an advantage would an overspending team get on the track? And what sanctions might an offending team face?

What is F1’s budget cap and why was it introduced?

A budget cap of $145m was introduced for 2021 with its main aim being to level the playing field, or at least to stop the bigger and better-funded teams from spending so much money, leaving the smaller teams far behind. Before the budget cap was introduced, a top team would have likely spent roughly three times the amount of one of the smaller teams.

The budget cap for 2022 was supposed to be reduced to $140m but rose 3.1 per cent with inflation to $144.34m. The whole thing is detailed in 56 pages of incredibly complicated financial regulations. We often talk about teams trying to exploit grey areas in the technical regulations but they are nothing compared to the grey areas in the financial regulations. Not included in the teams’ budgets, for example, are the drivers’ salaries, marketing costs and the salaries of the top three highest-paid staff members to name just a few of the exclusions.

In the regulations it states that if there is one more race or one fewer race than scheduled, $1.2m will be added or taken away from the budget cap, which gives you some idea of how much it costs a team to go to a race meeting alone. Multiply that by 22 for this year and what’s left is what a team can spend on car parts, development, spares and so on.

How difficult is it to stay within the budget cap?

In short, it will be difficult for the big teams to comply with the regulations but not at all hard for the smaller teams because they simply do not have the money. With the system and its regulation in its infancy, it was always likely that the big-spending teams could fall foul because they need to learn how not to spend.

Big teams have never had this problem before – this may be as difficult for them as even developing the car. F1 is all about spending money but the budget cap increases the importance of spending it wisely.

To some of the small teams $145m is a dream budget anyway. It is a situation where it is a lot of hassle for the big teams, but the numbers on the table are not going to make the small teams get any better. It means that instead of making all new parts, sometimes top teams will have to “cut and shut” as it were, which is what the smaller teams do anyway.

Mercedes say they had to make 40 staff redundant to stay within the cost cap. But, with the luxury of an unlimited budget they would have started with a much larger staff than most other teams and from their previous staff numbers, 40 is not that big a number. Red Bull said they had to make nearly twice that number of staff redundant. Budget control is always going to bring redundancies, but you do not want to get rid of people who make the car go faster.

As someone who has worked in F1 and saw the expenditure going to many and varied areas of the team, it is not surprising to see questions about teams spending too much. That said, it is difficult to truly believe how any team would send in a set of accounts with an overspend of five per cent – that would equate to just over $7m.

How much difference would $7m make?

That figure would be a very impressive development budget for any team. For those further down the grid, like Williams, and even those outside of the top three of Red Bull, Ferrari and Mercedes, it would be a godsend. It is an enormous amount.

That money would not just be spent on making new parts for the car, but on manpower, research, using better equipment and better tools to understand their car. The effect would be potentially massive. And any overspend that was there last year (2021) would carry forward in their performance for 2022 and for 2023, compounding the effects.

Even $1m could offer a massive increase in performance. If you take a new front wing for example, the research time, tooling, moulds and and getting the first one to the car would cost about $500,000 and then probably another $100,000 to create copies. For $1m you could have a new front wing and a new under-floor. Those two items alone can offer performance gains of several tenths of a second. In a tight championship, as 2021 was across the field, the benefit could have been critical.

What are the potential penalties?

The penalties that the FIA can give to teams for breaking the cap depend on whether the breach has been a “minor” (less than a five per cent) overspend or “major” (more than five per cent).

For a minor breach:

• Deduction of drivers' and constructors' championship points

• Suspension from one or more stages of a competition

• Limitations of ability to conduct aerodynamic or other testing

• Reduction of the cost cap

For a major breach – all of the above, plus:

• Suspension from an entire competition

• Exclusion from the championship

What would be the most suitable penalty?

Firstly, given how complicated the governing and regulation of the cost cap is, the FIA must be 100 per cent sure that a team did overspend. That will not be easy. Taking away points, or even exclusion, from a past championship is not a good place for F1 to be.

With this in mind, perhaps the best way to punish teams would be to limit their aero testing and wind tunnel time, as well as a further reduction of future cost caps.

Each team already has a set amount of wind tunnel and aero development time they can use in each season on a sliding scale, based on results in previous championships. This is currently policed and regulated well and would be easy to regulate or limit if needed.

Reducing the cost cap also seems like a simple choice. If you overspend by $1.5m in 2021, then that (and maybe more) comes off your 2022 limit and so on.