Introduced in 2021, the budget cap is enforced by the FIA to ensure each team conforms to the strict spending limit.
Now in its third year, the budget cap rules are enforced under a separate FIA rulebook – the Financial Regulations. For 2023, the budget cap limit is set at $135 million – this limit applying to each team and their car performance-related spending.
But, following Red Bull’s minor overspend breach in 2021 and the resulting fine – the second-largest in the sport’s history at $7 million – the auditing process carried out by the FIA each year means heightened tensions approaching the sign-off by the governing body.
How does the FIA enforce the budget cap rules?
The process of examining the 2022 F1 team books is currently underway, with the FIA set to sign off and issue the confirming teams their certificates of compliance over the coming weeks. This is considerably earlier than last year’s investigations into 2021, due to a sport-wide desire to hurry up the process.
FIA Single-Seater Financial Regulations Director Federico Lodi has explained the process as the sign-off on 2022 approaches.
“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,” he said.
“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.”
Lodi explained that, after the teams make their full submissions on March 31st, it can be a full month of merely analysing the information provided as the FIA pore through the books.
“When we talk about submission it’s not just a few spreadsheets,” he said.
“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.”
Why has the process of auditing sped up?
Given the desire of everyone to sign off on the previous year as quickly as possible during the following season, Lodi said the idea was to ensure the previous year’s championship and any possible penalties could be dealt with at an earlier point.
“It’s clear that there is an interest from the stakeholders to have a quick outcome,” he said.
“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 explained that, over time, the process can be refined as the teams and the FIA department become used to it, but that a timeline of a month or two is not particularly feasible. This is also dependent on what the investigations uncover, given teams need to be given a chance to explain themselves, with lawyers and advisory boards also being needed for consultation.
But all FIA cost cap administrators are seasoned auditors, with internal training specifically to tackle the intricacies of F1.
“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 said.
“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.”
FIA budget cap rules are an “evolving process”
With the financial regulations rulebook still quite immature in comparison to the well-refined Sporting and Technical Regulations, Lodi said the interpretations of different teams in how the regulations are applied has meant tweaks have been necessary.
“Of course, the regulations are not cast in stone,” he said.
“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.”