What is The Budget Cap in Formula 1 and How Does it Work?

The phrase ‘budget cap’ has been heard more and more often across media in relation to Formula 1 in recent times. But what is it? And how does it work?

Let’s find out.

As a sport, Formula 1 is perhaps one of the most heavily regulated in terms of rules and changes to rules. A post-season rarely passes without new rules being introduced, old ones being modified, and obsolete ones binned.

The ‘Budget Cap’ was a measure introduced last season in order to level spending between teams and reduce the gap generated by the different economic capacity.

WHAT IS BUDGET CAP? HOW DOES THAT WORK?

The budget cap in Formula 1 consists of a kind of maximum expenditure ceiling, which specifically is set at the figure of 135 million dollars that each team can spend during the year. In case of overrun of the budget cap, the team would face penalties to be served in the following season.

But that’s not all, since each team cannot decide independently how to allocate resources, the budget must be divided into the various spheres of work according to certain percentages, with 35% dedicated to labour costs, 20% dedicated to development and 45% to production costs.

WHAT COSTS ARE PART OF THE FORMULA 1 BUDGET CAP?

The costs subject to spending limitations can be summarized. Specifically, the budget cap acts on:

• The various parts of the car;
• The elements useful for the operation of the car;
• Personnel costs;
• Spare parts;
• The equipment inside the box;
• The costs of transporting the car and instrumentation.

In addition to this, all expenses related to the development of the car must also be charged to the expenditure ceiling.

WHAT EXPENSES ARE NOT PART OF F1’S BUDGET CAP?

What many ignore, however, is that not all team expenses are subject to budget cap constraints: many expenses, for example, remain outside. For example, teams can spend as much as they want on:

• Pilots’ salaries;
• Salaries of the three highest paid team members;
• Travel expenses for staff;
• Marketing expenses;
• Legal fees;
• Registration and license fees;
• Expenditure on parental leave or sick leave for staff;
• Bonuses and medical-health services for staff.

WHAT HAPPENS TO THOSE WHO DO NOT RESPECT THE BUDGET CAP?

There is a line (to the extent of 5%) in which the team can be subject to sanctions.

Before imposing a sanction, however, the FIA will carry out numerous investigations to understand the extent of the breach. In any case, the potential punishments range from economic penalties to deduction of points from the current season, through to a limitation of the use of the wind tunnel, or the reduction of part of the budget for the following season.