F1 Budget Cap – How and Why

Brought to you by TheJudge13 contributor Pipin

There has been much talk of capping budgets for F1 teams over the last several years – indeed, three teams entered on the false promise of such a cap, which we all know did not materialise. Every so often, sections of the media (including social media) and some of the ‘high ups’ in some teams start to publicly wring their hands and lament that the sport is too expensive, and only those with the biggest wallet ever have a chance to win.

But………isn’t this the case with most sport – football being a classic example – the clubs which can afford the star players tend to win – clubs which can’t tend not to. Other aspects of life too – those who have been to expensive public schools tend to earn more than those who went to the local state school – it’s just how life is.

Of course, there are exceptions to this – Coventry City once famously won the FA Cup, but that was a one off. Harold Wilson did not go to Eton yet still became Prime Minister, Pastor Maldonado once won a grand prix……..

SimtekColoni, Osella, ATS, Fondmetal, Forti, Eurobrun, Minardi, Pacific, Simtek, Larrouse – all names from the fairly recent past, names that many think as of failures – I see them as triers – they may have had dreams of winning races and championships – in the same way as Colchester United dream of winning the Premier League – in reality it is very unlikely, but at least they tried.

Other than Manor (one of the teams lied to about the budget cap), who else do we have that can be compared to these teams? One could argue about Sauber, Force India or Lotus – but all of these teams have been at or near the top of the pile in one incarnation or another. The sport is very short of teams with dreams……… Why? The cost to compete is just too high. The answer to this is surely to have a budget cap?

But I say NO!

Budget caps cannot ever work. It doesn’t matter how many commentators talk about ‘forensic accountants being able to check what is spent, teams will always find ways around it – how many ways do companies find of ‘massaging’ accounts so that they minimise their tax liabilities? If Ferrari or Mercedes Benz want to test (for example) a device which stores fuel in excess of what the engine needs right now, to give a ‘super boost’ when the engine calls for it, there are many of their own road cars they could use as the test mule.

Even if they wanted to try out a whole new power unit, there are ways of testing concepts in exotic ‘road’ cars – who is to say whether the development of valves made from costafortunium were developed for a road car or a race car? Once the technology exists, it can be used wherever, but the development costs attributed elsewhere.

The other problem with a budget cap is that teams are already effectively capping their own budgets. There is not a team in the pitlane that does not spend all the money they have – each team may have a different income and therefore a different expenditure, but they will all spend all that they can. This brings us to the crux of the matter.

I am going to use easy numbers rather than try to analyse real figures, but the principal holds true. Lets assume the budget cap is set at £100m. If team A has an income in prize money from FOM of £50m, in order to spend £100m, it needs to raise a further £50m from either sponsors, or drivers. If the team manages to do a multi year deal with Joe Bloggs Widgets to be title sponsor for £50m, then all is well with the world.

Team A can now select drivers purely on merit, rather than what they bring to the team in the way of money, and can say to any other sponsors who want to use the car as a mobile billboard “sorry, all the space is sold”. Sounds great – off they go and win races. In fact they do better than they did last year, and win prize money of £60m.

Add this to the money from Joe Bloggs, and now they have an income of £110m. What do they do with the other £10m? They can’t spend it. The only thing to do would be to use it as dividend payments to shareholders (which may or may not been seen as spending it, depending on the terms of the budget cap). If I were Joe Bloggs, I would now be jumping up and down with rage – I have paid out £50m in order to improve the car – buy gallons of Flo-Jiz (hail to the Hippo) or whatever, and you are giving away £10m of MY MONEY to investors – some of whom just happen to be employed by the team.

The other way round it would be for the team to say to Joe Bloggs “thanks awfully for your support, we don’t need all your money, have £10m back”. I can’t see the teams who are used to spending every penny wanting to do this, can you? Then of course, one of the team’s star drivers has a crash and needs to be replaced for a couple of races by another driver who scores less points. This year, team A finishes lower in the rankings and only earns £40m in prize money.

The commercial director now has to go back to Joe, and ask for an extra £20m to make up the budget, or persuade Joe that he no longer needs the whole car to be is favourite shade of pink, and please can we add a minor sponsor to your exclusive deal.

All far too complicated and totally unnecessary, all we need to do is to allow the teams to spend whatever they want, with a minor caveat.

cosworth_f1In the olden days (really not long ago) it was possible to build or buy a chassis, bolt in a Cosworth DFV and go racing – that’s what most of the teams I mentioned earlier (and there were many others) did. The DFV was a great motor, and was easily available at a reasonable price. We don’t have Cosworth any more (but there are rumours…..), and of course because Ferrari, Mercedes-Benz and Renault have spent gazillions on developing the hugely complex power units, they cost an eye watering sum for small teams to buy.

So here is the caveat. You can spend what you like on developing and building a power unit, and so long as it uses X number of Joules of energy per km it can be any configuration you like, and can run on whatever fuel you like. However, you must make it available to customer teams for £1m (we can work out the energy allowed and how many customers they must offer to at a later date).

Presto – we now have a formula that has the green credentials that are deemed necessary (the energy consumption can be reduced in subsequent years to make the sport even greener – much more sensible than the over complex total fuel volume and flow rate mess we have now), with multiple variations of how to use the energy (remember the days when V12, V10, and V8 all used to compete in the same race – now we could have V6, H16, W12, Solar, wheat-germ – whatever!), and recreate the ability for Joe Bloggs to get fed up of being a sponsor, and become a trier instead.

Ah but, I hear you say, what happens when the car makers get fed up of spending gazillions? Well, so long as the engine formula remains reasonably stable, once the R&D spend is out of the way, the annual cost is just manufacturing (yes I know the R & D costs need to be amortized, but what value in terms of marketing and publicity has Infiniti had from its association with Red Bull – R&D can be recouped as marketing). If they do get fed up and take their ball home with them, with a stable engine formula, others may be tempted to join the party (Cosworth, Judd, Mecachrome, Megatron, Supertech, Mugen, Pure, Life, Audi anyone?). With a stable engine formula, and sensible aerodynamic rules, we then get back to F1 being a drivers formula, without being a one make series.

There is no way of stopping the teams spending every penny they can get – the sport just needs to ensure that triers are allowed to give it a go.

Disclaimer: TheJudge13 provides a platform for Formula 1 fans to publish their voice on matters relating to Formula 1. The views expressed in Voice of #F1 Fans are those of the contributor and not those held by TJ13.

29 responses to “F1 Budget Cap – How and Why

  1. Hear hear!!

    I do miss playing spot the Pacific, my favourite tryers, they made F1 more appealing (too much Goliath vs Goliath gets boring for me). I agree budget cap is not the sensible way to go, rather reducing costs required to compete, mandated cheaper engines is a most sensible start, let the manufacturer bear the cost of R&D as much as they are willing to throw at it as long as they accept they must supply x teams with identical spec engine for affordable amount.
    I’d also look to reinstate in season testing (strange as it might sound), let Ferrari run day and night if they want so long as the likes of FI can rent out their car to run around Silverstone (who knows, they might even leave Manor in peace then)…for me shortage of teams/testing is killing off development route for talented young drivers. Allowing the smaller teams to share development costs and intellectual property on some components would help keep the have not so much (didn’t Sauber/FI/Lotus suggest this last year…can’t think why Ferrari and Red Bull would disagree when they will outspend the combined total anyway?) …oh and stop paying Ferrari so much for their heritage…and on that subject…Red Bull have no heritage, rather give the money to Sauber/Lotus – both been about a while haven’t they (maybe they would even be able to start honouring contracts then!!!!)

      • Groan!! Pinnacle of motorsport and not allowed test if the nice shiny metal bits (ok probably not metal nowadays but you’ll get my point) all link in together to make the wheels go round rather than shoot up into the air!What’s next, scrap Friday from race weekend to save money. And they expect to attract new manufacturers in to showcase their wares untested (think Honda 2015 with less opportunity to fix, or Renault 2014, 2015 and likely 2016 for that matter) – or am I just being naive again. Ah well, maybe if I’ m really good this year Santa might bring Fernando a good car next year 🙂

    • Well if the manufacturers are going to bear the full cost of R&D, then there won’t be any customer teams. Given that it’s not part of the regulations that X manufacturer has to supply engines to Y team, then they’ll just stick to supplying their own team and reap the benefits from it.

      • It’s a wish list of rule changes I’m talking about (daydreams I’ll grant you)…so let them spend only IF they accept to supply X teams for Y Euro’s…I don’t expect anyone to volunteer

      • Hi Fortis – I have read your comments with interest for some time, and thanks for commenting on my piece. I think you may have missed a bit,,,,,,,,”You can spend what you like on developing and building a power unit, and so long as it uses X number of Joules of energy per km it can be any configuration you like, and can run on whatever fuel you like. However, you must make it available to customer teams for £1m”….. Manufacturers can still spend the gazillions, but must make the product available to others – they still get the benefit of the publicity if Fortis F1, powered by MINI does well at Monaco next weekend

        • But would that not effectively force out the manufacturers? They want to build the best product possible, but if by doing so, they’ve then got to supply other teams at say 1% of what it cost them to build it, then what’s the point being there? Might as well take my gazillions elsewhere, where I can use it to make a profit.

          Though a sport, F1 is still a business for all these teams.

          The best way that could work, is along with a base price, state-what % of the R&D spend can be passed down to a customer team.

  2. Great idea but not sure many engine manufacturers are gonna want develop any kinda engine & sell for only 1mill a piece… I know that’s the automatic cost cap but they just would even consider it

    BTW, Col U knocked on the door of the Premier League back in 2007 in around the upper table half way through the season although it was no Fisi Spa pole position really

    • My point exactly – they are triers……. oh, and we can debate the real selling price of the power unit – it is the principle behind it that I was trying to get out. Thanks for reading my piece.

  3. I agree with you, I’ve had similar thoughts about a way to bring back freedom and entice all kind of manufacturors to the sport.

    What I’d like to add is ‘open source after 18 months’ – this is in fact what is already happening: to prevent endless lawsuits about patents, teams arre free to copy from eachother. So if I make a solar, regenerating, Hybrid diesel engine, people can have the plan after 18 months.

    This way innovation is stimulated but can be copied by anyone who wants to give it a try. In 18 months I make a copy of the ‘Google Audi hybrid’

  4. Good read, even though I think a budget cap could work if it’s researched properly and the budget is only associated with the car and not personnel salaries. Whilst they’d want to spend every penny of their budget, I get the feeling that other than the smaller teams, the larger teams don’t actually spend all that they’ve been allocated. Even in such a competitive environment, they still tend to be a little frugal.

    Btw…. That extra £10m can kept as retained earnings and used at a later date if say the 2nd scenario were to happen.

  5. You lost me with your comparison of a team of forensic accountants to the bureaucrats that check my company tax returns. A spending cap is definitely enforceable, if the participants would allow it. The “it’s not enforceable” cry, in F1, is only from those that don’t want spending controls or those that don’t understand forensic accounting.

    • But who is going to pay the astonomical sums of money the accountants will charge? Plus, they would have to go through every amount of money spent by each manufacturer. I imagine checking every Euro that Mercedes spends each year would take some time.

      • Well Mike, I would assume our gracious leader Mr E will provide the accountancy services… at a premium of course.

        It will then become regulated that accountants have to be used and with sufficient brown envelopes nothing will be found out of place after a week of digging.

        Mr E will have it all planned out.

      • Mayhaps the FIA should pass on Little Jean’s croissant, and use the hugely hiked fees that teams pay for each WCC point and those paid by drivers for their superlicence (way for Monsieur Todt to lower the costs for teams…) and put them to good use against those accountants…

      • Well. The $5m spent on crashing something 63 times will pay for a lot of accounting services.

        You forget. All F1 teams registered in the UK are already audited by accountants every year for financial reporting compliance reasons.

    • McMaster,
      I too agree that the budget cap could work and that accounting would be effective.
      The examples about developing engine bits and testing recovery components were not applicable. This cost is not about the F1 team, this is a cost for an engine supplier, and engine suppliers costs not been included in budget cap models.
      If there is a cap, and customer cars, then because of the cap the selling price of last year’s car could be fixed. If a team wants to cheat and gets away with it, then they will have to pass that savings on to their customer.
      Never has any cap model to date tried to be all inclusive for running an F1 team. Most that I have read exclude most personnel except team principal and one designer. The drivers wages are not included, nor are things like hospitality. There are a lot of areas that soak up extra cash, so that Mr. Bloggs will not need to worry that he is over funding the team.

      Pipin, I like your alternative ideas, but you don’t need to condemn the budget cap idea as unworkable for them to have merit.

  6. I agree that a budget cap won’t work but for far different reasons than stated in this article. Saying that forensic accounting won’t work is a bit too simple. A forensic accountant can dig out every penny spend and that’s why those guys are used by the IRS and similar organisations. No the real problem is in having the results of the forensic accounting be comparable. Just comparing the budgets of the R&D departments won’t work if you have 2 teams where their R&D departments don’t just research for the F1 team but also for the car division. So a budget cap can work when when the participating teams are forced to be completely separate from car manufacturers and suppliers of parts are forced to be part of the group of companies that are also researched by the forensic accountants. And because this can only be done on a voluntary basis this will never happen, but it’s not because the forensic accountants can’t do their job 😉

    I would much rather see a system where the FIA greatly expands on the list of parts that must have a lifetime of x races. Have rules that say that a team can only bring one new floor, 4 new front wings, 2 new rear wings, 2 diffusors, etc. per season. Don’t limit the amount of money the teams can spend on the part but limit the amount of parts that a team can bring during a season. This will greatly reduce the development speed in F1 and as a result it will save costs. The rich teams can still spend all the money they would like but it’s not like the small teams are overwhelmed by the shear amount of updates the rich teams bring. A good engineer can beat the rich teams by designing better parts in fewer tries and the only thing the money will bring the rich teams is that they have more certainty over the effectiveness of a part.

    • I would bet the race teams are completely separate legal entities from the manufacturers.

      Development/construction costs are the same for all teams and out of the blue strokes of brilliance are rare, so tracking expenditures is not all that difficult.

      • What prevents Ferrari from asking the car company to do some R&D for the race team? Or what about McLaren doing the same?. Or what about a team like Ferrari promising to award a road car supply contract if company x does the R&D without them paying for it. And it’s not that I think forensic accountants can’t find these costs it’s more a matter of are they allowed to also look at the expenses of the car company and/or suppliers so that they can find these costs? Don’t forget that they are privately hired accountants so having them look at the books can only be done if it’s voluntary. I can imagine Ferrari having no problem with the accountants looking at the race team’s books but not at the books of the car company. Same can be said about parts suppliers.

        So in order to make the costs truly comparable you have to have a possibility to find teams off loading R&D to supply chain companies without it coming in the books of the F1 team. Something like that every parts supplier has to be F1 certified and the certification can only be awarded if said company allows the F1 accountants inspect them.

        • If team A comes up with a development it has to show the work that has been done to support the conclusion. They don’t just pull designs out of thin air, they are developed in a logical and successive process and all steps would have to be accounted for.
          Your scenario requires that an awful lot of people/companies are willing to commit fraud.

          • I’m more thinking of things that are can be bought with a supplier (like for instance the whole rear brake assembly). And keep in mind that it can be done so that is perfectly legal from a business perspective but not from a sporting perspective. But maybe you’re right and it is too much hassle to make it profitable but the reason why I still think teams are capable of doing these things is because it’s the argument Luca di Montezemelo used to be against a budget cap 😉

  7. If the FIA had mandated the price to a customer of the current engines, then would have then up to the manufacturers to decide how much money they wish to spend on R&D, knowing they can only charge X currency units to their customers to recoup the spend.

    Totally agree that competitive teams racing with affordable machinery is far better than the willy waving contest between works teams we have now.

  8. Basic flaw in your logic – Joe Bloggs don’t spend $X on parts for the car or whatever. They spend that money on getting their logo plastered all over the car. If that’s the going rate, they’ll pay it – there might be a clause that drops the money if the team has a crap year, same way as drivers have break clauses in their contracts that let them move to a better team, but they don’t give a crap about what they spend it on as long as they get the coverage they paid for.

    Same way they pay $Y to Bernie & co for coverage, which goes straight into dividends for CVC/Bernie/etc.

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