The 2021 budget ceiling explained

What is a budget ceiling?

A budget ceiling is, in practice, a spending limit imposed on an entity (here, a Formula 1 team). In this case, it is about limiting the expenses of Formula 1 teams during the year.

Why a budget cap in Formula 1?

Since the beginning of the 2000s, and especially since Toyota’s brief stint (from 2002 to 2009), the big Formula 1 teams (notably Ferrari and Mercedes) have embarked on a veritable arms race to develop the fastest single-seater possible.

These big stables, which have almost unlimited resources (representing major car manufacturers), have driven budgets up to more than half a billion euros for Mercedes and Ferrari during the hybrid era.

In this context, small teams like Haas, who sometimes are not able to spend more than 100 million euros (5 times less than the top teams) per year, find themselves unable to compete on equal terms for victory or even a top 5 position (in practice, a car that was not a Mercedes, a Ferrari, or a Red Bull had almost no chance of doing better than 7th place). Worse, the gap between the big teams and the small ones sometimes amounts to more than a second, making small teams increasingly defect from F1, and no new team is attracted by being virtually unable to do better than 7th place on a regular basis.

Furthermore, team dominations are multiplying, and Mercedes’, which has lasted for over 7 years now, annoys many fans who want more excitement and unpredictability. With a grid of 20 cars, the risk of ending up with less than 15 cars on the grid was very high, resulting in a loss of image for the sport and consequently lower revenues for Liberty Media.

The idea of a budget cap dates back several years, but this time the FIA and F1 have decided to react in order to continue the (re)rise in power of the discipline worldwide.

What is the amount of the budget ceiling?

Initially, the budget ceiling was intended to be set at 175 million dollars (just over 148 million euros) per year, with a gradual decrease in the amount of this ceiling. But since then, the COVID-19 pandemic has come into play, with the 2020 championship delayed by 4 months and cut by 5 events, resulting in huge losses for Formula 1 teams.

These events have pushed the FIA and F1, with the teams, to find solutions to reduce the expenses of these teams in the short term and therefore allow the safeguarding of their financial health.

One of these solutions was to postpone the introduction of the new chassis regulations planned for 2021 to 2022, meaning that teams will keep their 2020 cars in 2021.

And the other major solution was to reduce the budget ceiling to 145 million dollars (approximately 123 million euros) for 2021, which will be reduced to 140 million dollars in 2022 and 135 million dollars in 2023 (just under 115 million euros). Nevertheless, the budget ceiling could be increased starting in 2024 if monetary inflation exceeds 3%.

The ceiling of costs related to capital for the teams (such as factory machines) has also been temporarily raised, increasing from 36 million (30.5 million euros) to 45 million dollars (just over 38 million euros) for this year, before returning to 36 million dollars starting in 2022, and at least until 2025.

Which areas are affected by the budget ceiling?

The budget cap applies to almost all areas (development of the car, staff salaries excluding drivers, damage, logistics…), but it excludes the top 3 salaries of the team as well as marketing costs, employee bonuses, charges (such as the cost of the factory), corporate tax, the cost of purchasing a customer engine (separately capped at 15 million euros), transport costs during Grand Prix and testing weekends (such as hotel and airfare costs). The entry cost to the World Championship as well as the cost of super licenses are also excluded from the cap.

The change in the ceiling in 2020 also made it possible to exclude new areas from the ceiling: the costs of employees on parental leave or sick leave, as well as employees’ health insurance.

This year, an issue related to the budget cap has been highlighted: that of damages related to accidents. The accidents at Imola, Silverstone, and Budapest have been much talked about, as the main teams involved (Red Bull, Mercedes, and Ferrari) announced that these accidents would have an impact on the budget allocated to the development of their car.

How is the budget ceiling enforced?

A Cost Cap Administration has been created this year to monitor compliance with the cap.

Since this year, teams must send by the end of June intermediate accounts of their expenses for the period from January to April. Then, they will have to send their annual accounts for 2021 in March 2022.

Furthermore, the FIA may, at its discretion, carry out a visit to a team’s factory to ensure compliance with the cost cap.

What sanctions?

Three categories of offenses are distinguished:

– Les infractions procédurales (comme une écurie envoyant des comptes imprécis ou bien en retard)

– Un léger dépassement du plafond budgétaire (dépassement de moins de 5% du plafond budgétaire)

– Un dépassement important du plafond budgétaire (dépassement de plus de 5% du plafond budgétaire)

Depending on the seriousness of the offense, 3 types of penalties can be imposed:

– Une amende, dont le montant sera fixé au cas par cas;

– Une légère sanction sportive, qui peut aller d’une simple réprimande à une déduction de points constructeurs/pilotes voire à une suspension pour un nombre donné de courses;

– Une importante sanction sportive, impliquant toutes les sanctions citées ci-dessus et pouvant aller jusqu’à l’exclusion pure et simple du championnat du monde.

The introduction of the budget cap this year marks the first step towards a more competitive and equitable Formula 1.