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F1's budget cap controversy explained: What happens if a team did overspend in 2021?

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Sergio Perez reflects on 'special' Singapore GP win (0:33)

Red Bull's Sergio Perez speaks after winning the Singapore Grand Prix. (0:33)

The biggest talking point over the Singapore Grand Prix was not Max Verstappen's imminent championship success but accusations that his team, Red Bull, may have overspent under Formula One's new budget cap last year. The story divided F1's paddock, with Red Bull team principal Christian Horner adamant that the accounts his team submitted in March fell under the budget cap and are compliant with the FIA's financial regulations.

Aston Martin was also rumoured to have overspent in 2021, but again the news was fuelled by whispers in the paddock, with official findings from the FIA only due to be announced on Wednesday this week when certificates of compliance will be issued to teams that met the cap last year.

If it is found that a team did overspend last year, it will then enter a process to determine a sanction, which could range from a financial penalty to, in the most extreme cases, exclusion or suspension from the world championship.

Why does F1 have a budget cap?

F1 is, and always has been, a sport of vast inequalities. From wind tunnels at factories to wheel guns in the pit lane, there are big differences in the equipment each team uses, which invariably leads to big differences in performance on track.

In order to level the playing field and avoid huge brands spending their way to success, F1 and the FIA introduced a budget cap in 2021 in the hope that it would level the playing field by putting the emphasis on each team's ingenuity rather than the depth of their pockets. Prior to the budget cap, the top teams had been spending well in excess of $400 million, and while the cap doesn't cover everything, the factors that directly impact car development are now kept in check.

For the first season of the cap last year it was set at $145 million and this year it has reduced to $140 million, although that number has since been altered to compensate for rising inflation this year and additional races and sprint races. Next year the target will be set at $135 million, although that figure will also be adjusted to come in line with inflation and additional races.

What do we know so far?

Perhaps not as much as some of the headlines last weekend suggested. For weeks, even months, there have been rumours that certain teams may have exceeded the budget cap, but until the FIA issues its certificates of compliance on Wednesday we won't know for sure. The process of auditing the team's accounts is supposed to be confidential, which is one of the reasons Horner was so irate when rivals accused his team of overspending.

The teams submitted their accounts in March, meaning there has been over six months of auditing by the FIA. That process has been done closely with the teams and in recent weeks has been in a stage of final checks, meaning any team that may have overspent would likely know by now that they could be in line for a penalty.

Even with additional clarifications over what falls under the budget cap since March, Horner says Red Bull is "significantly below, and with the clarifications we should be even further below".

He added: "We have not been informed that we are in breach of the regulations, so let's get to the end of the process and see where we are".

Nevertheless, both Mercedes boss Toto Wolff and Ferrari sporting director Laurent Mekies said in Singapore that it is an "open secret" that two teams breached the budget cap last year -- one by a small amount and one by a more significant amount. Those comments were backed up by several sources in the paddock, but for many there was still a wait-and-see approach to Wednesday's news from the FIA.

The one thing held in wide agreement was that if a breach has occurred, it should be dealt with seriously.

How big an advantage could a team gain by overspending?

This is the main reason the accusations levelled at Red Bull are such a controversial issue. The top three teams -- Mercedes, Red Bull and Ferrari -- were forced to slash their budgets last year, which included making staff redundant, cutting development time for this year's car and significantly reducing the amount of spares they produced.

Even a $7 million overspend, which would still be classified as a "minor" breach by the financial regulations, could have a significant impact on performance.

"Seven million will be like 70 engineers," Ferrari's Mekies says. "Seventy engineers, they will give you a serious amount of lap-time. That's one example. So, if you think about the power that these regulations have, these Financial Regulations have, it's probably overpowering both the Technical and Sporting Regulations at the same time if you think about the amount of lap time that is lying into those sort of numbers."

Wolff also questioned just how minor a "minor" breach would be.

"I think the word is probably not correct, because if you are spending $5 million more and you are still in a minor breach, it would still have a big impact on the championship," the Mercedes team boss said. "We obviously monitor closely which parts are being brought to the track by the top teams every single race in the 2021 season and 2022 season, and we can see that there are two top teams that are just about the same and another that spends more.

"We know exactly that we are spending $3.5 million in parts that we bring to the car and then you can say what it makes to spend another $500,000 - it would be a big difference. We haven't produced lightweight parts for the car in order to bring us down from a double digit overweight because we simply haven't got the money, so we need to do it for next year's car. We can't homologate a lightweight chassis and bring it in because it would be $2 million that we are over the cap.

"So you can see that every spend more has a performance advantage."

What's more, last year's budget was split two ways as it not only impacted the performance of the 2021 car but also the 2022 car. New regulations this year meant there was minimal carry over from 2021 to 2022 and all teams had to start from scratch with completely new aerodynamic concepts. Getting a head start on the latest generation of F1 cars would be crucial to success in F1's new era and the head start offered by extra expenditure in 2021 could be felt for several seasons to come.

What punishments are available?

That depends on how much teams have overspent. The regulations map out two types of breach: "minor" and "material" and they come with slightly different penalties. An overspend of less than five percent ($7.25 million for 2021) constitutes a "minor" breach, whereas an overspend of over five percent is a "material" breach.

The penalties for each are listed in the financial regulations and include a public reprimand, a deduction in points (both for constructors and drivers), exclusion or suspension from stages of the championship, limitations on the ability to conduct aerodynamic testing in the future and a reduction in the cost cap for the following year. However, "material" sporting penalties also include the possibility of exclusion and suspension from championships.

How would a penalty be decided?

If it is a minor breach then the team in question can enter a "accepted breach agreement" with the FIA's cost cap administration. Essentially, the FIA would suggest a penalty to the team, which it in turn it would have to accept and comply with. The details of the agreement would be made public in the interests of transparency, but omit any confidential information relating to the team's account.

If a material breach is discovered or the team does not agree with the terms of an accepted breach agreement, the sanctioning process gets passed on to cost cap adjudication panel. The panel is made up of between six and 12 judges, who are voted into their positions by the FIA general assembly. The judges would likely come from legal and accounting backgrounds and can be nominated by either FIA sport members or a group of five F1 teams in joint support of a candidate.

Decisions made by the cost cap adjudication panel can be appealed at the FIA's International Court of Appeal, meaning a definitive outcome could take weeks or even months if it is contested.

Why is this such an important matter in F1?

This is a huge test for the new era of F1. The FIA's financial regulations were introduced to make the sport fairer among all ten teams, so if a team is able to break them and not face a significant penalty, it would fly in the face of what they are trying to achieve.

Last year's championship battle between Lewis Hamilton and Max Verstappen underlined how tight the margins of victory are in F1, so even a small overspend could make a huge difference. It's also hard to unpick how big an advantage a team could gain if its overspend then snowballs into the development of the following year's car and impacts the results of subsequent championships.

An element of transparency is also key in the outcome of the auditing process. If a team can come under the cost cap by finding ways around the financial regulations, there's a real danger that the sport becomes an accountancy championship instead of an engineering one. It doesn't matter how brilliant a team's design office is as long as a rival can find a loophole in the way it accounts for expenditure elsewhere and pump more money into car development. That makes it all the more important that the FIA issues a fair but firm punishment to any team that has exceeded the cost cap. Otherwise why not accept a penalty one year to ensure success the next?

All ten teams agreed to the terms of the cost cap when it was being drawn up and were involved in the formation of the financial regulations that govern it. In theory, there should be no defence if one or more of them is found guilty of exceeding it, but don't expect the issue to be swept under the carpet regardless of the outcome of Wednesday.