How does FIA monitor the controversial cost cap?

Since 2021, Formula 1 teams are running under a cost cap to keep control of their spending. The sport introduced the financial ceiling to move the field closer and give the smaller teams a chance to get closer to the previous leading outfits.

The original plan was to introduce a maxmimum amount of $175m in 2021, but the Covid-19 pandemic urged the sport to lower that financial ceiling down to $145s. Formula One then wanted to reduce the amount by $5m per season for the 2022 and 2023 which meant the teams have to complete the current season with a budget of $135m.

However, inflationary adjustments have been made last year due to the price increase that hit the economy last year.

The cost caps applies to most salaries, car development costs and race weekends, including transport, but does not apply to the cost of buying in an engine, for customer teams, or developing a power unit for factory teams.

There are further expenditures that do not fall under the cost cap, including driver salaries, tha wages of the three highest-paid staff members, marketing spend, property and legal costs, entry and license fees, parental and sick leave payments and employee bonuses.

However, there were question marks regarding the way the FIA can govern team’s expenditures. Those fears then became real last year when Red Bull were found guilty of breaching the 2021 budget cap of $145m by $1.8m. The Milton Keynes-based outfit was given a $7 million fine and a 10% reduction in wind tunnel testing.

The Financial Regulations are midway through their third year of application, and the FIA have increased capacity to reduce timescales, ensure clarity and make the rules even more robust going forward.

Federico Lodi was appointed FIA Single-Seater Financial Regulations Director, who has a bigger team around him this year to monitor the financial situation.

Speaking about the time frame his team needs to review team’s expenditures, Lodi said: “The first full cycle of review took place in 2022 based on the 2021 submission and, overall, it was a positive experience for us and for the teams. We’re now quite far into the 2023 review of the 2022 submissions.

“In advance of the full submission, there is an interim submission that is mandated for the 30th of June of the season then in progress, so for the 2022 season, teams would have sent us their interim submission in June of last year, and the full submission on March 31 this year.

“The interim submission is really just to allow teams to understand where they are in their projected spending, and for us to try to anticipate any discussion that may take place as a result. So there is a little bit of preparatory work that is done before the full data is submitted.”

Given the complexity of a Formula One operation, teams have to submit a huge document to explain their actual financial situation and expenditures

“When we talk about submission it’s not just a few spreadsheets. Each submission is composed of a 150-200 page document, so there is a lot of documentation to go through. So, the first month is usually dedicated to a detailed review of all the documentation to perhaps identify areas that require a little bit more in-depth analysis.

“We then identify follow-up questions and request more documentation, if needed, in preparation for our planned arrival at their facility. This is where we basically undertake an on-site audit and this usually starts at the beginning of May. And from then onwards we basically spend months on the road, visiting one team after another and basically rubber stamping their submission.”

FIA’s procedures were criticized last year as it took over half a year to complete their analysis. In fact, the governing body announced last September that Red Bull were found guilty of breaching the regulation and it took another month to come up with the penalty. Lodi said that the FIA have ramped up their work by adding new people to their financial department.

“It’s clear that there is an interest from the stakeholders to have a quick outcome. We, as the FIA, understand these requirements, so we have strengthened the department, and now we have 10 full-time employees working on Formula 1 financial regulation. This is a significant increase over last year, when it was just four.

“However, it is still clear that it’s difficult to commit to a rigid timeline, as there are many variables that need to be taken into account. First, there are the findings themselves – what we identify and what we need to dig into further.

“On top of that, we also have to take into account the fact that we do the review with the support of the team, and obviously, the finance department of the team is also busy with running its business; they may also have a reporting commitment to their shareholders for example. So, while we need to work as quickly as possible, for us the most important thing is not to undermine the robustness of the process.”

Lodi hopes that the lessons the FIA and teams were able to learn from last year will help the system to become more robust in the future.

“I think that in year one, there was a little bit of uncertainty, because it was the first time a financial regulation had been brought into professional motorsport,” Lodi added.

“Also, I think that for the teams it was a little bit challenging, because the regulations are objectively complicated, because the businesses we have to regulate are complicated. When we are talking about organisations with 1000 employees, undertaking engineering activities, manufacturing activities, with commercial and racing arms. So the business is complicated.

“Now, after last year I am confident that the doubts everyone had last year are clarified. So hopefully, going forward, we will have less and less difference of interpretation in respect of the regulations. Even if they are still discussing how to interpret things on a weekly basis.”

Last year saw that different interperations were opened up as teams were trying to find loopholes to try and find a competitive advantage by interoperating the rules cleverly. Lodi said that the FIA is constantly making tweaks to the regulations to close off the loopholes.

“It’s clear that there are some tweaks that need to be made. And we are constantly trying to evolve the regulations. It’s a learning process for everyone. So we are trying, on a yearly basis, to improve the regulatory framework.

“Obviously, these differences of interpretation have led to changes to the regulation or clarification for the sake of clarity. So, it is an evolving process. We have the Financial Advisory Committee that is composed of a representative of the FIA, a representative from FOM, and one representative from each of the teams and that body is there to discuss and propose amendments to the regulations to be tabled at the F1 Commission and then the final step is the World Motor Sport Council.

“Last year, the number of clarification requests varied significantly from team to team. I think this is another lesson everyone learned from last year. What we have seen after last year, is that now, almost all the teams are very forthcoming and are now trying to discuss with us any doubts they have beforehand. This is another aspect that will hopefully reduce the risk of misunderstanding,” Lodi concluded.