What is the F1 cost cap? Honda and Alpine commit 'procedural breach'

The team was fined $7m (£6.05m) and had its aerodynamic testing allowance cut by 10% for a year  as a result of spending £1.864m (1.6%) above the cap, which was classified as a minor breach (of less than 5%). Not all rivals were content. Lewis Hamilton pointed out that even a small overspend could have a significant effect — particularly in the close 2021 season where Max Verstappen controversially beat him after the final race in Abu Dhabi. Hamilton claimed that he could have won the 2021 title if Mercedes had spent an additional $300,000 (£270,000).

The cost cap was one of three key measures introduced to make F1 more equal and deliver closer, more unpredictable racing. Along with the spending limit came more stable funding, as a new commercial rights agreement shared F1 revenue more evenly between teams. The new 2022 technical regulations then introduced ground effect to allow cars to follow — and fight — more closely.

Scroll down for an in-depth look at the cost cap and how it works.

What is the cost cap?

The cost cap limits how much each F1 team can spend in a single season in a bid to level the playing field across the grid and make the sport more financially sustainable.

It 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 (this is subject to separate cost restrictions).

After years of different proposals, the $145m cost cap first came into force for the 2021 season, as teams were working on the following year’s new-generation car. The spending ceiling will reduce by $5m a year for the following two seasons. Development costs should be lower as technical rules remain almost unchanged, and the lowering cap is expected to push teams to greater efficiencies.

How much is the cost cap?

The 2021 cost cap was $145m. It reduced by $5m to $140m in 2022, but that was tweaked mid-season as inflation soared worldwide, giving teams an extra 3.1%, or $4.3m (£3.6m). The cost cap calculations were based on a 21-race calendar, so teams also got an extra $1.2m allowance for each additional race.

In 2023, the cost-cap dropped by a further $5m to $135m (£122m), but this was also based on a 21-race season. A $1.8m (£1.43m) allowance for each additional grand prix takes this year’s total to $138.6 (£110.4m) — the cancellation of the Emilia Romagna Grand Prix doesn’t affect this calculation.

Questions over the cost cap

After the heated discussion around Red Bull’s breach last year, officials at motor racing’s governing body, the FIA, will have breathed a sigh of relief that all ten teams were given a clean bill of health by its Cost Cap Administration for the 2022 accounts.

But that doesn’t mean that all is well behind the scenes. There have long been suspicions that teams with additional businesses — such as producing road cars — could use technology developed in those areas to benefit their F1 programme, without adding to their F1 budget.

Earlier this year the FIA issued a technical directive, ordering teams to include in their budget the cost of of any intellectual property that they used in F1 but developed outside the series.

Announcing its report into the 2022 accounts, it said: “The review has been an intensive and thorough process, beginning with a detailed analysis of the documentation submitted by the competitors.

“Additionally, there has been an extensive check of any non-F1 activities undertaken by the teams, which comprised multiple on-site visits to team facilities and careful auditing procedures to assess compliance with the Financial Regulations.”

However, as noted ahead of the report, some teams are suspicious of the number of updates that rivals are bringing to races and the investment that they are putting into their factories.

What does the cost cap cover?

The cost cap covers all expenditure related to car performance, excluding the cost of purchasing or developing an engine.

It includes:

• All car components (including spares)
• All equipment needed to run the car
• All garage equipment
• All team personnel excluding drivers and selected others
• Transport costs
• All additional costs

The most crucial area of these cost cap rules is car development: teams must now make crunch decisions on which parts to develop, how much to spend on these parts and how many they need – all the while keeping it under the budget cap.

The cost of repairing accident damage or replacing failed parts all comes out of the budget cap, so a few unfortunate races can make a significant dent to upgrade plans.

What does the cost cap not cover?

A number of standout costs are not included in the budget cap, which are:

• Driver salaries
• The three-highest paid team members
• Travel costs
• Marketing costs
• Entry and racing licence fees
• Non-F1 or road car activities (including heritage and promotional)
• Sick leave and parental payments
• Employee bonuses

Engines, due in part to their complexity and the fact that some teams produce their own and others buy in, are not included in the cost cap, but development costs are covered by a separate cost cap.

What is the penalty for breaking the cost cap?

Penalties have not been clearly set out, partly to avoid a situation where teams see the benefits of breaching the cost cap outweighing the penalty that they would face.

Another factor is that points deduction penalties only apply to the season in which the breach occurred, resulting in a season where championships could be changed almost a year after they seemed to be decided.

If a team makes an overspend of under 5%, then that is classed as ‘minor’ breach and can be penalised with fines, points deductions or development restrictions. Anything more and it is a ‘major’ breach, which is likely to attract more severe penalties and could result in a team being thrown out of the championship.

The potential penalties could be one or more of the following:

Who decides the cost cap penalties? 

It was originally stated that any break of the cost cap would have penalties decided by the Cost Cap Adjudication Panel, where the full range of penalties could be applied.

However, with the recent Red Bull cost cap breach, the FIA prevented things reaching that stage by offering an ‘Accepted Breach Agreement’, essentially a negotiation process which exists in the financial regulations.

An ABA can include smaller financial penalties, limit participation in some sessions and aerodynamic testing.

Williams’ procedural breach – essentially an issue with its financial reporting – was negotiated via an ABA and resulted in a $25,000 breach for the Grove team.

Some of the more severe penalties for cost cap breaches, including a points deduction and a reduction in a future cost cap, are excluded with an ABA.

The agreement allows both parties to move on swiftly, as there is no appeal process.

Red Bull’s cost cap breach

If the end of the 2021 F1 season wasn’t controversial enough — as Michael Masi dispensed with safety car procedure at the Abu Dhabi Grand Prix to engineer a final lap of racing and all-but guarantee Max Verstappen would win the racer and championship — there was still a sting in the tail.

In October last year, the FIA revealed that Red Bull had overspent in the 2021 season as a result of procedural errors. Most of these related to administrative functions, such as catering, social security and travel costs, but they also included payments made to the Red Bull Powertrains division.

Defined as a ‘minor’ overspend, the breach totalled £1.864m and was resolved with an ‘Accepted Breach Agreement (ABA)’ negotiated between the FIA and Red Bull.

The team was fined $7m (£6.05m) and had its aerodynamic testing allowance cut by 10% for a year — a penalty that comes to an end this October.

How is the cost cap monitored?

Teams have until the end of March to submit their paperwork for the previous season, but in reality, they are in constant discussion with the FIA to clarify what accounting techniques are allowed and which aren’t. As well as specific guidance on areas such as maternity and sick pay, it would also include advice on how to account for spending and investment that covers multiple seasons.

“We have been discussing non-stop with the FIA for two years,” said then-Ferrari sporting director Laurent Mekies earlier this year. “It was a new regulation, we have pretty much the FIA living with us in our factories, going back and forth with questions, clarifications every week.”

The level of investigation required, which includes examining linked businesses, means that the past two annual reports have taken around half a year to produce, appearing in the autumn after the summer break.