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As Formula One pushes toward a more sustainable future, targeting a net zero carbon footprint by 2030 and introducing greater electrification in its power units from 2026, keeping costs under control becomes more and more important.

Although incoming manufacturers such as Honda, Audi, and Ford may be committing to F1 programmes, none are willing to pour hundreds of millions into projects that offer little in the way of return. The cost cap – a base of $135 million this year, plus minor increases for extra events and inflation – helps ensure their investments won’t spiral.

But for the competitive landscape, the cost cap is also vitally important to F1’s future. Right now, Red Bull has a march on the field, and the other three members of the ‘big four’ — Ferrari, Mercedes, and Aston Martin — are a step ahead of the midfield.

Over time, F1 expects these advantages to ebb away as other teams update their facilities, and the largest teams cannot spend their way out of trouble as in previous eras. It has given hope to the chasing pack that someone can catch Red Bull.

“That’s one of the things the cost cap was intended to do, to level the playing field,” Zak Brown, the CEO of McLaren, said last month.

“I think everybody is pretty much running at maximum budget. The driver line-ups are the best I’ve ever seen in Formula 1. And I think what you see is an unbelievably condensed field.

“Hopefully, the nine of us can all pick it up a little bit, so we can make it a 10-team show.”

How F1’s cost cap works

This isn’t the first attempt to introduce cost control to F1. Max Mosley, the FIA president from 1993 to 2009, campaigned to get team budgets under control towards the end of his tenure. He lobbied for cost caps around the $50 million mark, only for the political clout of the big manufacturer teams, unwilling to cut costs so dramatically, to quash it.

It wasn’t until the end of the 2010s, amid rising costs, that teams finally embraced the idea of limiting spending, which had gone upwards of $300 million per season for some of the biggest operations. Plans were put in place for a new budget cap of $175 million per season starting in 2021, only for the impact of the Covid-19 pandemic to prompt this to be revised to $145 million, a figure that would fall by $5m for each of the next two years. There are exclusions to this figure, such as driver salaries and marketing costs.

F1, the FIA, and the teams jointly drew up the financial regulations in a similar format to the sporting and technical regulations. Just as teams’ cars have to comply with the rules, so must their accounts.

The process to ensure their compliance comes under the remit of Federico Lodi, the FIA’s financial regulations director. Lodi spent two years as the finance director for Toro Rosso, now known as AlphaTauri, before taking up similar roles with companies involved in food production ahead of a return to motorsport in 2018 when he started his current role.

Lodi and his team work with the financial departments at all 10 F1 teams, answering questions throughout the year and making clarifications where needed to help their submissions. After each season, teams have until March 31 to submit their data and documents to the FIA. According to Lodi, a submission typically entails around 150 to 200 pages of documents featuring financial statements, supporting evidence, and other relevant information.

“It’s not just a few spreadsheets,” said Lodi. “It’s quite a lot of documentation that we need to go through.”

Lodi and his team will spend the first month after the submissions going through all the data, which varies from team to team. Smaller outfits such as Haas and AlphaTauri have far simpler structures than the likes of Red Bull, Mercedes, and Ferrari, who also have crossovers with engine or advanced technology divisions.

“I have 10 entities (to audit), and I have people in all the 10 entities doing F1 and non-F1 activities,” said Lodi. “This will generate, for us, an additional degree of complication because we need to go and track down all the costs.”

With the initial assessments complete, the FIA will conduct on-site visits to each of the 10 teams from around the start of May. The fieldwork helps answer outstanding questions and allows the FIA staff to properly inspect the teams, ensuring everything is in line with the submission.

Once the process is complete across all teams, the FIA will prepare to issue compliance certificates to teams that have come in under the budget cap.

Or, as was the case in 2022, start proceedings against any teams deemed to have exceeded the cost cap.

Red Bull’s breach

The first suggestions emerged around last year’s Singapore Grand Prix as the FIA completed its final checks and calculations: Red Bull had exceeded the 2021 budget cap. The team fiercely denied any wrongdoing, but the FIA subsequently announced Red Bull had committed a ‘minor breach,’ going over the spending limit by less than 5%.

It led to Red Bull entering an ‘Accepted Breach Agreement’ with the FIA acknowledging it had surpassed the cap. The full report from the FIA revealed Red Bull had gone over by $2.3 million after incorrect interpretations of various exclusions, including social security benefits, power unit payments, and even team catering. The FIA said there was no evidence Red Bull had acted in bad faith and noted that had the team applied a notional tax credit correctly, the breach would only have been $550,000.

Nevertheless, Red Bull was hit with a $7 million fine and a 10% reduction in its aerodynamic testing for 12 months. Team principal Christian Horner called the sanctions “enormous” and “draconian,” estimating it could cost up to half a second in lap time. But rivals were doubtful of its true impact, with Ferrari being the most vocal in its condemnation, expecting the penalty would have a “very limited” impact as Red Bull could spend the money saved on aerodynamic testing elsewhere.

Fast forward eight months and Red Bull remains F1’s dominant team, sweeping the opening seven races of the season. While its wind tunnel time is still reduced through to October, its advantage is such that the chasing teams already look resigned to waiting until next year before mounting a serious challenge again, leading to questions over what real impact the sanction had on Red Bull.

In April, Ferrari boss Fred Vasseur said that while nobody could deny that Red Bull did a “very good job” with its car, “If you ask me if the penalty is too light, I say yes.”

The FIA deliberately writes financial regulations are deliberately written without defined sanctions for breaches, so teams do not simply buy their way to success, knowing the penalties would be worth it for the benefits. But Lodi felt it was important the sporting action against Red Bull showed the teams had to take the financial regulations seriously.

“If you exceed the cap, you can’t get away with just the financial penalties,” said Lodi. “There must be some kind of sporting penalty. This was, for us, a principle that we wanted to apply.”

Making improvements

Like the sporting and technical regulations, the financial rules are subject to constant review and tweaks. Lodi said it would be “quite presumptuous to say we got everything right from day one” with the financial rules, but also highlighted the collaborative nature of the process. As with all rules in F1, the teams are heavily involved in crafting the regulations.

The FIA’s financial department is always open to contact from the teams seeking clarification over the cost cap rules concerning what is included and excluded. Lodi found different approaches between teams last year that meant the number of clarification requests “varied significantly from team to team”: some were “really forthcoming,” and others were “a bit more silent.”

That’s changed this year as the FIA goes through the process of analyzing the 2022 data. “Now, almost all the teams are very, very forthcoming,” said Lodi. “Now they are trying to discuss with us beforehand any doubts that they have. This is another thing that hopefully will reduce the risk of misunderstanding.”

The FIA has also strengthened its financial department, increasing the number of full-time employees in Lodi’s team from four to 10.

One area that FIA president Mohammed Ben Sulayem pinpointed as being somewhere to improve is the speed of the process, saying last year it “should be done earlier” in the future after the FIA kept teams waiting until the end of October 2022 to find out the full results of the 2021 audits.

Lodi said it was “very difficult” for his team to commit to a timeline of when the process will be completed this year as they could not compromise the thoroughness of the process.

“But keeping this in mind, obviously, the target for us is to speed up as much as possible the process,” he said. “I hope, and I’m confident, that this year we’ll be quicker.”

Visits remain ongoing to teams, and Lodi said his team is very much in “audit, audit, audit” mode right now. But after it proved to be such a big political storyline in F1 last year, the cost cap will inevitably be a big point of scrutiny once the FIA’s analysis is complete in the coming months – especially if there are any breaches.

Top photo: Mark Thompson/Getty Images



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