People have been talking about a Formula 1 cost cap for years and while some progress has been made we are still far from a legitimate spending cap. The hugely funded teams obviously believe that their ability to outspend gives them an advantage so they are doing everything they can to prevent restrictions. Smaller teams, however, must be more efficient in their spending and want to force that on their larger competitors to have a better shot at winning races and championships.

Much has been written about the political environment surrounding this decision, and I’m no expert on FIA and Formula 1 bylaws, so I won’t beat that dead horse. I do wish to discuss one possible cost-cap structure and crowd-source ideas for a solution. Read on, and add your comments below!

Research and development

Red Bull and Ferrari won’t be happy with my suggestion here. I believe the only reasonable solution to controlling the cost of research and development is to impose a hard cap on what can be spent on the car and the engine. Logically this should be some percentage of what the high-budget teams are outlaying and probably land somewhere around where the mid-field teams are spending.

A cap set at 60% of what Ferrari spent in 2013 – about $250 million - puts us at $150 million, or somewhere between what Lotus and Mercedes spent that same year. That still allows an advantage over the mid-pack teams for Ferrari, Red Bull, Mercedes, and McLaren but requires many more efficiencies within the teams. Keep in mind this is a spending cap only on engines and the cars themselves. We will get to other team expenses later.

In addition to capping the cost of research and development, other efficiencies can be realized with the usage of common parts. Economies of scale will reduce the cost of wheels and wheel-nuts, fuel cells, ECU’s, and whatever other parts the FIA deems shall be common between manufacturers leaving money to be spent in other departments. This is done to some degree in Formula 1 already, but not nearly to the scale which it could, and probably should be.

Talent

Here’s where we get the big-boys on board with this plan. In this proposal, there will be no cap on spending for the salaries of drivers, mechanics, team bosses, or any other talent the team wishes to acquire. If Red Bull wants to use the difference between their current spending and the above cost cap amount to spend entirely on Sebastian Vettel, then so be it. Maybe he is a $100 million driver… but if you ask my opinion, Red Bull would be smarter to pocket a little bit of money and turn the F1 team into a revenue generating enterprise rather than a couple of carbon fiber tubs one throws money into.

There is one small caveat to this unlimited spending, however. In order to further balance the teams and add some kind of equity such that the top teams don’t end up with all the talent, there should be a “luxury tax”. Any money spent over a certain amount on payroll will be “taxed” by the FIA. Total team payrolls are hard to find on the interwebs, so I don’t know what a realistic number for this would be but we can say $35 million for drivers plus some other amount for mechanics, team management, etc. Any number over that amount would be taxed and put into a fund to be distributed among the other teams the following year.

Major League Baseball does a luxury tax of 17.5% on every dollar spent on players over $189 million. This tax grows to 30%, 40% and 50% for each consecutive year a team is over the salary cap. Something similar in Formula 1 would be beneficial to the smaller teams and would discourage absolutely preposterous spending on drivers and technical heads.

Breaking it all down

One final assumption before we break down the costs. Spending on entry fees, hospitality, travel, factory costs and anything else other than on R&D and talent would be unrestricted. This will make for some rather nice motor-coaches in the paddock, I think. So here’s what the cost would look like with three mythical teams and a fictional luxury tax fund.

• [1] (Drivers' Luxury Tax Fund – Team’s Driver Luxury Tax) / Number of competing teams - 1
• [2] ($115 million - $30 million) / 10 other competing teams
• [3] $115 million / 10 other competing teams
• [4] (Team Luxury Tax Fund – Team's Luxury Tax) / Number of competing teams - 1
• [5] ($85 million - $20 million) / 10 other competing teams
• [6] $85 million / 10 other competing teams

So in this model there is a super-spendy team, a mid-pack team spending the same amount of money on the car but less on their talent pool and a trailing team who nonetheless is probably profitable.

I don’t imagine this is the only or best way to implement a budget cap, only a suggestion. Post in the comments below if you have suggestions, corrections or lamentations on what I’ve proposed above.