Cost cap to keep F1 wheels on the road

Federico Lodi, FIA head of financial regulations says: “Formula 1 by design is a high stakes, high speed sport which relies both on remarkable technology and close competition to raise the adrenaline of audiences. One of our key targets has been to ensure that there is a better balance between these two elements for the future, to ensure that the sporting spectacle remains at the heart of Formula 1 whilst still ensuring that the system is meritocratic, where the best teams and drivers will rise to the top.

“In recent years there has been a risk, heightened by the impact of COVID, that teams would really struggle if we did not tighten spending across the Championship. It was crucial for us to put measures in place that would allow teams to compete fairly on-track, by restricting the level of funds to be invested off-track.” 

Deloitte believes that the regulations could also indirectly support other initiatives in F1 such as improving environmental sustainability, supporting the sport’s commitment to net zero by 2030, as teams seek to be as efficient as possible with existing resources in order to stay under the cost cap.

Deloitte’s first task was to support in assessing the current state of play, working with the FIA and Formula One Management (FOM), the commercial rights holder of F1, to analyse the costs of all F1 teams, pinpointing their areas of highest spend and providing benchmarking analysis, to illustrate how cost control regulations have been adopted across the other sports and highlight relevant aspects to be considered for F1.

They also met with each of the ten F1 teams to set out how potential financial regulations could work, discuss what impact it would have on their organisations and to ask for their feedback on the process.

For Calum Ross, an assistant director in Deloitte Sports Business Group, working closely with F1 team principals and their finance divisions, as well as the FIA and FOM, was vital: “The success of the financial regulations depended on a number of factors, but finding a balance across the F1 teams in respect of the value of the cost cap was critical. We needed to strike a fine balance between creating financial regulations that would facilitate financial sustainability for all F1 teams, without restricting innovation and development of new technologies that are at the heart of F1’s identity. Technology innovation will be crucial in allowing teams to reach environmental sustainability objectives, so it was key that the caps didn’t stand in the way of this.”

After nearly two years of development, the World Motor Sport Council approved the financial regulations in October 2019, with the regulations set to come into force on 1 January 2021, limiting teams to a global cost cap on their expenditure, with certain exclusions and adjustments such as the exclusion of marketing and heritage activity costs, race driver fees and the cost of each team’s three highest paid personnel.

Launched with a three-year plan to allow for F1 teams to gradually adjust the size and scale of their operations, teams in 2021 were limited to spending of $145 million in 2021, which was reduced to $140 million in 2022.

Following cost and benchmarking analysis and consulting with the teams themselves, Deloitte supported the FIA throughout the process of drafting and launching the regulations and the associated regulatory framework. This included leading on the drafting of guidance to the F1 teams to support their interpretation and compliance with the regulations and advising on the design of suitable reporting templates and monitoring procedures. Deloitte also advised on the suitability of the regulations, to ensure they were consistent with other frameworks used across sport and that they would provide an equal footing for each F1 team.

For Ross Brawn of FOM, managing director - motorsports, the success of the financial regulations alongside revised technical and sporting regulations has been clear to see: “There’s no doubt the 2021 season showcased some of the most thrilling races we’ve ever seen in the history of the Championship. This had a direct impact on audience numbers, with the F1 season finale drawing 108.7m viewers, 29 per cent higher than the same race in 2020 and cumulative TV audiences for 2021 up by 4 per cent on 2020, reaching 1.55bn.

“The financial regulations have pushed teams to be more resourceful in how they develop their cars ahead of race days and to think more carefully about where they are allocating their budgets, at the same time as supporting closer competition which is sustaining and attracting interest of both old and new fans around the world.”

Deloitte is continuing to work closely with the FIA providing further input to the evolution of the financial regulations and the broader regulatory framework for Formula 1, including the financial aspects of the recently approved power unit regulations to come into effect for the 2026 season. The firm has also been appointed to support the development of financial regulations for Formula E, the world’s first electric street racing series and the first global sport to be certified with a net zero carbon footprint from inception in 2020.

“Formula 1 continues to smash records for audience figures and follower growth around the world," said Calum. “Facilitating the competitiveness of the highest number of teams on the track is stoking the drama, while ensuring the financial sustainability and improving the environmental impact of the sport for the long-term.”