Formula 1 cost cap: What is it and how does it work?

There are a few sports that don’t require a dime to play. Running, swimming and wrestling spring to mind. Motorsport – and Formula 1 in particular – has always been the antithesis of those. By its very nature, large sums of money are required even to bring a single grand prix to life. Most of the drivers hail from wealthy (or connected) families, without which they wouldn’t have got into motorsport in the first place. The cars themselves represent the peak of automotive technology, backed by brands keen to show theirs is the best. And let’s just say that’s a fight that can’t be won on a shoestring.

Still, as every ordinary household on the planet is figuring out right now, a little sacrifice can bring a lot of savings. Neither of those two s-words comes naturally to decision-makers immersed in a competitive struggle, but regulations can force them to tighten their belts. And though such rules came to Formula 1 far later than they did to many other sports – and even other motorsport categories – they’re now a big part of the game at the pinnacle too.

What is the F1 cost cap?

The F1 cost cap limits the amount a team can spend on its cars over the course of a given calendar year. It first came into force in 2021. The original plan – which was hammered out before the pandemic hit – was for the spending cap to be $175m. But when COVID-19 wreaked havoc with the 2020 season and threw some teams into a desperate financial situation, it was cut down to $145m. The plan was to further reduce the amount by $5m per season for 2022 and 2023, with only inflationary adjustments thereafter. Those adjustments have already begun to be applied, however, thanks to the rampant price increases that have hit the global economy during 2022.

Why does F1 have a cost cap?

Some teams have enormous budgets, while others make do with relatively modest amounts of money. This tends to correlate to performance on the circuit, and make it almost impossible for ‘poorer’ teams to catch up in terms of speed. The cost cap is primarily a long-overdue attempt to level the playing field, but also to ensure enough teams survive to make up a grid. Plus, in a world where there’s an emphasis on saving and sustainability, it’s also a step in the right direction for the image of a sport many see as sinfully profligate.

Spanish GP start

Photo by: Sam Bloxham / Motorsport Images

What comes under the F1 cost cap?

Any expenditure related to car – but not engines – performance is relevant for the cost cap. This includes:

All parts on the car (from the steering wheel to the wheel nuts)
All the elements needed to run the car
Most of the team personnel
Garage equipment
Spares
Transport costs
Everything in between

The biggest area of focus is car development costs, with teams having a weigh up what is developed, how much is spent on each part which is manufactured and how many of the parts are needed and can be afforded without overspending.

What doesn’t come under the F1 cost cap?

There are several big-ticket things that aren’t covered by the cost cap, including:

Driver salaries
The wages of the three highest-paid staff members
Travel costs
Marketing spend
Property and legal costs
Entry and licence fees
Any non-F1 or road car activities
Parental and sick leave payments
Employee bonuses and staff medical benefits

Engines – which are more complex because some teams make their own while others buy them – are covered by their own set of cost regulations.

Singapore Grand Prix start

Photo by: Steve Etherington / Motorsport Images

What are the penalties for breaching the F1 cost cap?

Beyond trifling procedural misdemeanours to do with reporting, there’s a clear line in the sand regarding cost cap transgressions: exceeding the set amount by 5%. Beneath that figure, it’s officially defined as a ‘minor overspend’. When Red Bull became the first team to fall foul of the cost cap with its 2021 spending, the overspend was found to be 1.6% and thus clearly in this ‘minor’ territory.

Go above 5%, and teams are in the ‘material overspend’ zone. But the sand on either side of the line is pretty blurry in terms of what penalties might apply. Spending is a complex area to regulate once you get into the details, so the rules have deliberately been written to allow for case-by-case punishments. As such, the wide range of possible penalties that can be given is similar for both minor and major rule breakages – it features exclusion from races, points deductions, fines and testing limitations.

It’s not even essential that the punishment should necessarily be applied to the same season in which the naughtiness occurred. But there’s one key difference if you’ve overspent by more than 5%: you can be kicked out of an entire F1 world championship season.

What penalty did Red Bull get for breaching the F1 cost cap?

In Red Bull’s case, which remains the only precedent for cost cap overspend penalties at the time of writing, a two-fold punishment was applied. The team had to pay a fine of $7m and accept a 10% restriction on its aerodynamic testing for a period of 12 months.

The outcome could have been worse had the Milton Keynes squad not been co-operative and entered the Accepted Breach Agreement it was offered during the investigation, which concluded late in 2022. The fine itself doesn’t count towards that year’s cost cap expenditure.