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MODULE 5

COST CAPS VS. CAPITAL EXPENDITURE:
SPEED LIMITS VS. PIT STOPS

Lesson 12

CAPITAL EXPENDITURE LIMITS

In Formula 1, there are rules about how much teams can spend on building and improving things like their factories, equipment, and other infrastructure. These are called capital expenditure limits, and they ensure teams don’t overspend on long-term upgrades while still allowing smaller teams to catch up. Capital expenditure limits and cost caps are both financial regulations in Formula 1, but they serve different purposes and focus on separate aspects of team

Think of cost caps like speed limits on the racetrack—they keep teams from going too fast (spending too much) in their annual budgets for things like car development and operations. Everyone must stay within the same limits to keep the competition fair.

On the other hand, capital expenditure limits are more like pit stops—they’re about making long-term improvements, like upgrading your tools or facilities. Smaller teams get a bit more time (or budget) in the pit lane to catch up, while bigger teams are already cruising smoothly and don’t need as much. Both rules are there to make sure the race stays exciting, competitive, and balanced.

Capital expenditures are not included in the cost cap; it’s in a separate budget. Cap ex investments are for the future rather than yearly operational costs like a cost cap. This budget separation makes sure that teams can improve their facilities while staying within the bounds of the cost cap.

Both cost cap and capital expenditure limits aim to reduce the gap between top teams and smaller teams, they just do it in different ways:

  • Cost caps focus on restricting yearly spending on performance-related activities.

  • Capital expenditure limits give smaller teams more flexibility to build better infrastructure, which supports competitiveness over the long term.

Together, they ensure a more sustainable and balanced F1 environment, where resources are distributed more evenly without excessive spending by top teams.

In summary, while cost caps control how much teams spend annually, capital expenditure limits manage how much teams can invest in their infrastructure over time. Both work together to create a fairer, more sustainable Formula 1.

For example, in 2024, teams that finished at the bottom of the standings since 2020 can spend up to $65 million over four years to improve their facilities. This gives them a chance to upgrade their tools and equipment, which is important for competing better in the long run. Teams in the middle and top of the standings have lower limits: Mid-tier teams can spend up to $58 million. 

Top teams can spend up to $51 million.
This system helps smaller teams grow and perform better without breaking overall budget rules. By limiting how much teams can spend but giving smaller teams more room to improve, F1 ensures more balanced competition and supports its goal of sustainable growth.

These adjustments reflect F1s commitment to innovation and fair competition, like the NFL’s current focus on balanced revenue and salary models. Both leagues are evolving their financial strategies to ensure their sports remain competitive and accessible for new participants.

Lesson 13

ADVANTAGES OF THE
FORMULA 1 FINANCIAL MODEL

The model keeps F1 exciting, fair, and rewarding for everyone involved. Here’s how:

A Fairer Playing Field: The cost cap helps smaller teams compete better by limiting overall team spending (though driver salaries aren’t capped). This makes the races more exciting and competitive. 

Freedom from Teams: Teams can sign their own sponsorship deals, giving them the freedom to create a financial plan that works best for them. 

Rewards for Hard Work and History: Teams that perform well or have been around for a long time--and helped make F1 what it is today--get extra bonuses.

Lesson 14

CHALLENGES OF THE
FORMULA 1 FINANCIAL MODEL

Nothing is Perfectly Fair--Especially for the Little Guy: Legacy teams (those with a long history in F1) get a bigger share of the financial pie. While it’s a nod to their contributions, it can make it harder for smaller or newer teams to catch up.

Heavy Dependence on Sponsorships: Smaller teams often struggle to attract big sponsors, which can leave them financially shaky compared to their well-funded rivals.

Big Gaps in Driver Pay: Driver salaries aren’t part of the cost cap, which means some drivers earn more than others. This can make it tricky to keep the fair balance and can cause tension about who get paid how much.

Lesson 15 

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