HOW F1 WORKS

THE COST CAP

The F1 Cost Cap initially came into force for the 2021 season and was introduced with the intention of limiting the amount of money a team can spend on designing, building and operating its cars over the course of a calendar year. The Cost Cap was implemented by the FIA, which also polices the money spent by the teams.

The budgets available to F1 teams vary enormously and generally a team’s performance and its eventual finishing position in the World Championships broadly correlates with the available budget, due to the significant cost of development, engineering and construction. Of course, there are exceptions, but due to the nature of the current regulations, the better-funded teams tend to perform better than those working on lower budgets.

Prior to the introduction of the Cost Cap, the budget of an F1 team was effectively limited only by the amount of sponsorship and investment that the team could secure. The teams at the front of the grid were often working with budgets that were completely unattainable for those running in the midfield or towards the rear of the grid. Such is the cost of cutting-edge F1 technology, and the competitiveness of the sport, that it is extremely difficult for a team working with a relatively modest budget to catch up with a team working with a budget limited only by the Cost Cap.

Significant penalties — both financial and sporting — can be imposed for exceeding the Cost Cap. As a result, working within the limits of the Cost Cap has become a critical factor in the running of an F1 team, along with the design, development and operation of its cars. The Cost Cap has implications for almost every area of an F1 team’s activities.

The Cost Cap regulations

The Cost Cap regulations are incorporated in the official ‘Formula 1 Financial Regulations’ issued by the FIA.

According to the FIA Financial Regulations, the objectives of the Cost Cap are to limit ‘certain costs that may be incurred by or on behalf of an F1 Team in each Full Year Reporting Period relating to the operation of an F1 Team, including costs incurred to develop, manufacture, test, and race F1 Cars in the Championship, while leaving that F1 Team free to decide how to allocate resources within that Cost Cap’.

The regulations also state that: ‘Together with the FIA Formula One Financial Regulations for Power Unit Manufacturers, these Financial Regulations are designed to achieve the following objectives:

a.   to promote the competitive balance of the Championship;

b.   to promote the sporting fairness of the Championship; and

c.    to ensure the long-term financial stability and sustainability of the F1 Teams, while preserving the unique technology and engineering challenge of Formula 1.’

Teams must submit all the required documentation for the ‘Full Year Reporting Period’ ending on 31 December in the previous calendar year to the FIA for scrutiny by 19:00 CET on 31 March.

The power units are subject to a separate set of Financial Regulations, partly due to the fact that some teams (notably Mercedes and Ferrari) design and build their own power units, while others buy in power units from suppliers.

As with all FIA F1 regulations, the Financial Regulations are comprehensive and detailed, but are aimed primarily at covering the amount of money that can be spent on:

•    All of the car’s components, with no exceptions.

•    All spares provided for the team’s cars over a season.

•    All of the equipment and resources required to operate the cars, including garage equipment.

•    The majority of the team personnel (with exceptions).

•    All transport costs incurred in transporting cars and the equipment used to run them during the season.

Costs that are excluded from the defined Cost Cap include:

•    Driver remuneration, including fees paid to ‘a connected party’ (this exception applies to the two main contracted F1 race drivers and any additional drivers employed by the team to drive its F1 cars).

•    The remuneration of the three highest-paid members of the team beyond the drivers.

•    All costs directly attributable to marketing activities.

•    All costs attributable to ‘heritage asset activities’.

•    All finance costs and Corporate Income Tax costs.

•    All costs directly attributable to ‘non-F1 activities’.

•    All costs directly attributable to human resources activities, finance activities or legal activities.

•    All property costs.

•    All employee bonus costs.

•    Staff parental and sick-leave payments.

•    Championship and race entry fees and required licences.

•    All flight, rail travel and hotel costs in connection with a race weekend or testing of current cars by personnel.

•    All financial penalties in respect of any breach in the Financial Regulations.

•    All employment termination benefits paid to employees.

•    All sustainability initiative costs.

•    All costs directly attributable to entertainment provided for the benefit of all employees on a substantially equal basis, subject to a maximum amount of $1 million (£726,000).

So essentially, with a few well-defined exceptions, the Cost Cap covers the design, development, build, testing and racing of a team’s car for each F1 season.

The Cost Cap numbers

The original intention was to introduce the Cost Cap regulations to coincide with the first year of the new-era ground-effect cars planned for the 2021 season, with a Cost Cap of $175 million (defined as £135,912,000/€153,792,000 by the regulations in 2021), assuming a 21-race calendar (adjustments were made to the cap if the number of races changed). This would allow teams to design and develop cars to meet the new regulations with no Cost Cap, before the budget restrictions were introduced for 2021.

Due to the Covid pandemic, the introduction of the revised Technical Regulations relating to the new-era ground-effect cars was postponed until 2022, with the previous Technical Regulations in force for an extra year in order to save costs. The Cost Cap was still introduced for 2021 (applying to the financial reporting year ending 31 December 2021), but the cap was reduced by $30 million to $145 million (defined as £114,254,000/€132,034,00 by the regulations in 2021) in order to help soften the blow of the impact of the pandemic on the teams’ finances. At the time, it was felt that the future of several of the less-well-funded teams was at risk due to the financial hardship brought about by the pandemic.

The cap was reduced by $5 million per year for 2022 and again for 2023. From 2023 to 2025, the Cost Cap remained at $135 million (defined as £106,375,000/€122,928,000 by the regulations in 2025).

With the introduction of substantially amended Technical Regulations for the 2026 season, resulting in significantly revised cars, the Cost Cap was based on a 24-round championship (with adjustments to the cap made if the number of races changed). To take account of the investment required to develop and build the new cars, and the rising costs due to the world economy, the Cost Cap rose for the financial reporting year ending 31 December 2026 to $215 million (defined as £170,090,000/€189,992,000 by the regulations in 2026), a significant rise of nearly 60 per cent over the 2025 figure, with the costs excluded from the Cost Cap remaining as previously.

Policing the Cost Cap

Each team must supply Full Year Reporting Documentation, covering the calendar year, by 31 March the following year. Each team must also submit Interim Reporting Documentation by 19:00 CET on 30 June of the relevant financial reporting year.

The FIA’s Cost Cap Administration is responsible for administering the Financial Regulations, including reviewing the required documentation supplied by the teams. The Cost Cap Administration can appoint an independent audit firm to assist with the review process if necessary. The Cost Cap Administration can effectively also make spot checks on the controls being applied by teams to ensure that they comply with the regulations, in addition to reviewing specific transactions and carrying out investigations into a team’s compliance with the regulations. Surprise visits to teams’ factories are not unknown.

Because some teams buy in components, and complete systems, such as transmissions, from other teams, and certain teams have access to manufacturing resources as part of their non-F1 business (for example metal-casting as part of their road-car business), which is not available to other teams, the Cost Cap Administration pays careful attention to the declared cost of items to ensure that they are not sourced at preferential rates.

If the Cost Cap Administration judges that a breach of the regulations has occurred, it has the power to appoint a panel of six independent judges to adjudicate the case.

There are various categories for a breach of the Cost Cap regulations, including:

•    Procedural breach — generally relating to late or incorrect submission of documentation, but also includes delaying or impeding the activities of the Cost Cap Administration, and also failing to communicate the implications of the Financial Regulations to all personnel and training them as necessary to fulfil their obligations.

•    Late and non-submission of full-year reporting documentation — a late submission notice will be issued and an extension may be granted if the team can provide a valid written explanation of why the submission is late.

•    Minor overspend breach — this occurs when a team’s Full Year Reporting Documentation shows that the Cost Cap has been exceeded by less than five per cent.

•    Material Overspend Breach — this occurs when a team’s Full Year Reporting Documentation shows that the Cost Cap has been exceeded by more than five per cent.

Penalties for exceeding the Cost Cap

In the event of a team exceeding the Cost Cap, a range of sanctions can be imposed by the Cost Cap Administration. The FIA has deliberately not set a scale of fixed penalties tied to the level or type of breach, in order to prevent teams from weighing up the effect of a penalty against the likely advantage that may be gained.

Sanctions that can be imposed by the Cost Cap Administration are divided into three categories:

•    Financial penalty — a fine to be determined on a case-by-case basis.

•    Minor sporting penalty — including: a public reprimand; deduction of Constructors’ Championship points; deduction of Drivers’ Championship points; suspension from one or more stages of a race weekend, or weekends, including the race itself; limitations on the ability to conduct aerodynamic or other testing; reduction of the Cost Cap applied to the team.

•    Material sporting penalty — including: deduction of Constructors’ Championship points; deduction of Drivers’ Championship points; suspension from one or more stages of a race weekend, or weekends, including the race itself; limitations on the ability to conduct aerodynamic or other testing; suspension from an entire championship or race weekend; exclusion from the World Championship; reduction of the Cost Cap applied to the team.

Power Unit Cost Cap

The Power Unit Cost Cap, which came into force on 1 January 2023, is separate from the Cost Cap applicable to the teams, but operates in broadly the same way. The Power Unit Cost Cap is intended to limit expenditure on power unit development with the aim of ensuring that no single power unit manufacturer has a significant advantage due to its available budget.

The power unit is defined in the FIA Technical Regulations as the internal combustion engine, plus the exhaust system, turbocharger, MGU-K (electric motor), Energy Store (battery) and control electronics. The power unit Cost Cap includes all research, development and production costs.

For the 2022 season — the first season of the new ‘ground-effect’ era — the FIA Sporting Regulations suggested that the price charged by a power unit manufacturer to a team to acquire engines for a single F1 season should be no more than €15 million (around £12,900,000) unless agreed otherwise by the power unit manufacturer and a new team.

From 1 January 2023, the FIA Formula 1 Power Unit Financial Regulations stipulated that the Power Unit Cost Cap for the 2023, 2024 and 2025 seasons was $95 million (defined as £76,459,000/€90,210,000 by the regulations in 2024).

For the financial reporting year ending 31 December 2026, and subsequent years, the Power Unit Cost Cap was raised to $130 million.

The items included within the Power Unit Cost Cap and those excluded are similar to those mentioned previously under the Cost Cap applicable to teams. Two significant extra items that fall under the Power Unit Cost Cap are the cost of fuel used by the engine manufacturer (not the fuel used by the teams at the circuits), which must be costed at $20 per litre, and the cost of operation of a Single-Cylinder Dynamometer (a single-cylinder test device used to simulate the operation of the internal combustion engine) by the fuel manufacturer during the development of fuel, which must be costed at no less than $4 million.

The implications of the Cost Cap

In order the meet the Cost Cap, a team must control costs extremely carefully and, compared with the era of unlimited budgets, sacrifices must often be made to avoid breaking the regulations.

All team members must be aware of the Cost Cap regulations and must bear in mind the implications when carrying out their jobs, particularly when buying in or using resources and materials.

In order to stay within the Cost Cap, decisions have to be made on where money can be saved, and one particular area where this has been felt is in-season car development. A team must make decisions on the balance of budget that can be allocated to development of its current car versus the spend on designing and developing its car for the following season. Prior to the introduction of the Cost Cap, front-running teams would be working on the design of their next car from the start of the season preceding its introduction, often with a separate team of engineers focusing purely on the new car. Similarly, teams would often introduce upgrades and continue aerodynamic development throughout a season, right up to the final race.

Since the Cost Cap came into force, this is no longer the case, due to both the number of personnel available to work on car development and the cost of the resources required to carry out that development. For instance, if a car is not performing as well as anticipated, and it not fighting for a championship, a team may elect to stop aerodynamic development mid-season to enable the transfer of engineering staff to work on the car being developed for the following season. Also, the number of in-season upgrades introduced by teams has dropped significantly from the pre-Cost Cap era.

Savings must also be made by reducing waste during production processes, and by carefully controlling the cost of the materials used. There must also be a focus on allocating financial resources to the areas that the engineering team feel will most improve performance, rather than experimenting in areas that may prove of limited benefit in terms of optimising lap times. Whereas in the past the selection of a particularly exotic carbon-fibre specification for a specific component may have provided a small weight saving but not been strictly necessary for structural integrity, nowadays it may well not be possible to justify the extra expense if it affects the spend on other areas of the car.

An area that can have a major effect on a team’s development budget is crash damage. If an accident results in major repairs, the cost can be significant, and if a team is unfortunate enough to find its cars involved in a series of accidents, the financial challenge can be significant. In late 2024, Williams Team Principal James Vowles told ESPN that five major incidents involving its cars over the course of two races, in Mexico and Brazil, ‘took out five front wings, five floors, five rear wings, three gearboxes, two engines, two chassis. You are into the millions — less than 10, but more than three.’ Additionally, a team literally cannot afford to have numerous spares sitting on shelves waiting to be used in the event of problems, so the number of spare parts manufactured and transported to races has dropped dramatically since the introduction of the Cost Cap.

There is also the spectre of taking a wrong turn during the design process. Pre-Cost Cap, it was possible in theory for a team to ‘spend its way out of trouble’ by changing tack during the design process, or investing to rectify major problems as quickly as possible, but that is no longer possible. Today, if pre-season testing reveals a major problem with a car — for instance with the chassis or transmission — due to an unforeseen design shortcoming, and the car is off the pace, it is difficult to rectify the problem quickly during the season while staying within the Cost Cap and not affecting other areas of the team’s operations.

Efficiency in all areas and maximising the use of the permitted budget — at least for teams in a position to reach that budget — is now a vital factor in the operation of a leading F1 team.

As can be seen from the details of the Concorde Agreement (see panel earlier in this chapter), the prize money awarded to the top teams in the Constructors’ Championship goes a long way towards contributing to the teams’ overall budget within the constraints of the Cost Cap, but far less so for the teams finishing further down the order.