Tost: F1 cost cap possible; send in the accountants

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Photo by: www.kymillman.com/f1

It’s a conundrum we’ve discussed many times before, how do you institute a cost-cap in Formula 1 with massive manufacturers such as Mercedes, Ferrari and Renault? According to Franz Tost, much of the teeth-gnashing is unnecessary.

“I have been fighting for years for a budget cap and it is coming now hopefully,” said Tost exclusively to Autosport. “I think it is doable.

“There were always arguments that you cannot control it, which is nonsense. You can control everything.

“The FIA, and FOM, whoever, just have to start [thinking] from the very beginning onwards about how to control it.

“If I decided, I would send to every team a person to control all the financial statements every week or every month. That’s it.

“Like now, for example, on the technical side you can control everything.

“We are not even allowed to test without passing crash tests and all this kind of stuff.

“So why shouldn’t you be able to control [budgets]? This is nonsense, you can control everything if you want.”

I understand his point but I might argue that having 20 dedicated FIA certified accountants on location at each team breeds intellectual property concerns, confidentiality risks, and other concerns over just how much these accountants know about motorsport programs, building race cars and managing team finances. Also, would Christian Horner want an FIA person rummaging through his team’s balance sheet or P&L? I wouldn’t.

Now, there is no doubt the big manufacturers can absorb a $400 million investment through marketing, R&D and other channels but a team like Williams, Sauber or even Toro Rosso cannot, that’s not their budget.

What does Tost tell Autosport the logical conclusion is regarding this disparity?

“There are three top teams, and the rest are in another league.

“Because if you look to the results, the cars behind the three top teams are 20-40 seconds behind, and the commercial rights holder must find the way, so that we have interesting races.

“Fortunately this year and also last year [Sebastian] Vettel is fighting against [Lewis] Hamilton for the championship because otherwise people would not watch Formula 1 any more, because it’s boring.

“We must be aware about this and what we have to achieve is that a minimum of three or four drivers, and five or six teams, are fighting for the championship, and the championship is decided in the last race and not a couple of races before.”

Effectively he’s suggesting we really have a two-tier racing series. The have’s and the Have Yacht’s as they used to say. I’m not sure a cost-cap is a doable thing and I have stated that it seems to me the costs could be capped or at least frivolous if you write a very tight regulation formula that reduces the ROI for overspending. It’s not a perfect solution but it seems much more doable than planting accountants inside teams.

Hat Tip: Autosport

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Tom Firth

Most of the F1 teams are presently at least legally based in the UK. Companies House, the UK companies register allows for the public to access free audited end of year accounts of any UK limited company as well as details of persons with significant control so in theory quite a lot of information about the teams profit and loss etc is already available. The issue comes when you ask which company name are the FIA going to take this data from? The company name registered on the FIA F1 World Championship entry list? The parent company? The ultimate parent… Read more »

Tom Firth

O and when have we had 3 or 4 drivers and five or six teams fighting for the drivers or constructors championship… Never. This is F1 not Indycar.

jakobusvdl

The ‘Class B’ championship this year is a really tight scrap between 4 or 5 teams and drivers, and they’re all operating within the budgets being suggested as the ‘cost cap’.
So if that’s the type of competition even financial resources leads to, wouldn’t that be a great outcome?

jakobusvdl

Tost is more than likely right. The construction and technology industries in the UK, NZ and internationally, successfully use ‘open book accounting’ in Target Cost contracts, under the New Engineering Contract suite of contracts. It works well, doesn’t involve onerous levels of supervision, and verification, and has been applied to really high tech, complex projects with good results. Its a contractual arrangement, that is negotiated between the parties (just like is going on between L.M and the Teams). The contracts have terms and conditions about what costs are ‘allowed’, how resources are accounted for, how materials and services are procured… Read more »

jakobusvdl

The other aspect that makes these Target Cost projects effective is that they typically run a ‘gain share / pain share’ incentive process. So if the actual costs are below the Target cost, the contractor (Team), gets paid 50% of the saving. And if the actual costs exceed the Target cost, they are only reimbursed a percentage of the over spend. Thats a big incentive in construction where the profit is typically less than 5% on a big project. I’d imagine a similar incentive process could be devised for an F1 model, to make overspending the cost cap too punitive… Read more »

jtr

A system like the NBA luxury tax could work. The NBA has a soft cap on the amount of money that can go to player contracts, and any amount over that is “taxed” at a rate that ranges from 1.5 to about 5 times the overspend, based on just how far the team is over the cap and whether they were over in the past. There are also a bunch of carveouts that allow relief when teams do things like resign their own star players or add a low-cost role player . The FIA could do something similar, allowing exemptions… Read more »

jakobusvdl

Yep, that sounds like a relevant option, and one that will be familiar to the L.M guys.

jakobusvdl

It is difficult for us to know how the bounds around the teams would be set and policed, but the teams already operate under constraints on wind tunnel time, and data processing volume, and as far as we know they abide by those constriants.
So if that works under the current regime of unconstrained spend, why should we assume it couldn’t be made to work under a new regime?