Allegations of Red Bull Racing having cheated in this year’s Formula 1 season are running rampant. Here’s what you need to know about the cost cap allegations.
Formula 1 is unique to other sports in that the machinery required to compete — in addition to normal human capital costs like payroll and talent acquisition — is incredibly expensive. As such, the history of the sport has been defined by big spenders. The victors, traditionally, are those that have the money to spend and do so frivolously.
Of course, teams that have to operate more economically can occasionally spend smarter and make do with less, but they’re infrequently running at the top of the sport for long periods of time. Money always wins.
In 2021, F1 implemented a cost cap. Here’s what the cost cap is, why it matters, and how it relates to the latest allegations of cheating being thrown at Red Bull Racing.
What is the cost cap in F1?
F1’s cost cap could be likened to a salary cap in other leagues.
The mechanism of a cost cap prevents teams from spending above a certain amount on their vehicles each year. This creates artificial parity between teams with different financial backings.
Why does F1 need a cost cap?
The need for a cost cap in F1 is due to the enormous range of budgets teams would have if there was no cost cap at all.
Compare the sport to something like the NBA. In the NBA, to position your team for wins you need to acquire simply talent. Mainly, you need a good general manager to put together a good coaching staff and quality roster. Overall, most NBA teams accrue revenue the same way: Tickets, merchandise, arena and jersey sponsorships, and other similar streams.
In the F1, it’s much different. The expenditures are there for talent, but one of the crucial elements is your car and engine, extremely expensive items.
On the opposite end of the income statement is revenue, which is vastly different from the uniform approach in other sports leagues. Some teams get significant revenue from sponsorships. Some teams are solely racing teams (such as Williams), some are extensions of car manufacturers (like McLaren) others are diversification subsidiaries of brands that exist in far different markets (such as Red Bull Racing).
Some teams have pay drivers, which means the drivers themselves are incredibly wealthy or come from wealthy backgrounds, and a significant portion of the team’s revenue comes from donations that more or less pay for the driver’s seat in one of the team’s cars (Esteban Ocon at Alpine is a strong example).
Since the income is vastly different team-to-team, enormous disparities in resources exist. That is even more true in times like a pandemic. Red Bull’s (the rolled-up company, not the racing team) overall business model was impacted far differently during the pause in racing than a team that operates solely as a racing team.
How much is the F1 cost cap in 2022, and what counts toward it?
The F1 cost cap in 2022 is $140 million.
There are many expenditures that aren’t included in the cost cap. They include the driver salaries, the three highest-paid staff members, travel costs, marketing spend, entry fees, and employee bonuses, among other things, per Motorsport.com.
Most car parts and costs direct to the machines aside from the engine count under the cost cap. Engines are restricted by their own cost regulations.
What happens if F1 team goes over the cost cap? What are the penalties?
Teams are given a bit of leeway with the cost cap. Technically, teams won’t be penalized at a significant level for going over the cap if the spend is deemed to be immaterial. For its purposes, the materiality level includes aggregated spending above 5% of the cost cap.
The Cost Cap Adjudication Panel reviews such instances and assesses penalties for each specific case, meaning there are no cut-and-dry penalties. It can range from a fine to points deduction to removal from the Constructor’s Championship altogether.
The panel also mentions in its documentation that it will consider aggravating and mitigating factors. So depending on the situation, qualitative factors could make breaking the 5% materiality threshold less (or more) of a deal.
Why is Red Bull Racing being accused of cheating the F1 cost cap?
The FIA has said Red Bull Racing violated the $145 million cost cap in 2021. RBR won the Constructor’s Championship that season.
McLaren CEO Zak Brown wrote a letter in light of cheating, essentially turning the public discourse against RBR while the FIA’s investigation is ongoing, which puts the heat on the whole situation. Brown, according to The Athletic (subscription required) said he didn’t mention any teams specifically but was writing in general to the FIA. Brown gave the letter to all teams except RBR.
Christian Horner, RBR’s chief, has denied the allegations and suggested that reported numbers ($1.8 million is the number floating around) are untrue. $1.8 million would be just 1.2 percent of the total cap, below the 5 percent materiality threshold. Therefore, this is considered a “minor” breach.
According to RacingNews365, the team was $4 million under the cap, but went over it due to a $5.8 million listing of expenses it wasn’t aware of or didn’t expect.
- $800,000 in gardening leave and sick pay
- $1.2 million in catering costs
- $3.8 million in spare parts and UK tax
Interestingly, according to the financial regulations, Section 3, subsections v and w, sick leave should not count toward the cost cap in the first place, so it’s interesting to see where these numbers are coming from.