A Return to the Formula 1 Accounting World Championships (#335)

Accounting Penalties in Formula 1

The topic of this episode is a return to the Formula 1 accounting world championships, which I talked about in June, in Episode 326. To refresh your memory, I talked about the new cost cap rules in Formula 1 racing, where if your team spent too much money, you could be penalized for it. So, it’s worth returning to the topic, because what I talked about back then has happened. The violating party was Red Bull Racing, which inaccurately excluded some expenditures from its cost cap. The total amount by which they exceeded the cost cap was 1.6 percent, or two and a quarter million dollars.

Under the rules, this is considered a minor overspend breach, for which the penalty should be fairly minor. However, the Cost Cap Administration Committee tagged them with a seven million dollar fine, and – probably more importantly – a reduction in the amount of wind tunnel testing they can do for the next 12 months.

I’m looking at the full report on the cost cap breach right now, and I would guess that the reason for getting whacked so hard is that this wasn’t just one case of not following the rules. It was actually thirteen cases, including things like not properly accounting for social security contributions, the accounting for bonuses, travel expenditures, and even how fixed assets are disposed of. So, it sounds like Red Bull had some significant accounting control issues throughout the organization.

Though, to be fair, I’m going to include some testimony from Red Bull’s team principal, Christian Horner. He held a press conference about this, and noted that Red Bull took some aggressive stances on which expenses should be included in the cost cap, and which ones should be excluded. And he may have a point, because there are some gray areas in the rules, and those rules are extensive. So, maybe we have some control issues, and maybe we have some management decision issues.

Wind Tunnel Testing

So, getting back to the wind tunnel testing. This is really important, because, on a per-lap basis, there isn’t really that much of a speed difference between the cars. If your car has a one-second advantage per lap, that’s enormous. In the front of the pack, a reasonable difference in lap times is more like one or two tenths of a second. So, the teams have got to put their cars into wind tunnels for hours and hours to test various configurations.

Back before Formula 1 decided to make things more competitive, the top couple of teams would spend tens of millions of dollars each year on wind tunnel testing, pretty much doing it around the clock. So, as the season progressed and they gained more experience with the cars, the best teams would keep making adjustments and eventually pull away from everyone else.

But under the new rules, the team that did the worst in the preceding year – which was Williams Racing – is now allowed the most time in the wind tunnel, while the winner – which was Red Bull Racing – is now allowed the least time in the wind tunnel. It’s sort of like the draft order in American football, where the worst team gets the top draft pick for the next season.

So, now that Red Bull has won the 2022 championship, not only does it get the least wind tunnel time for its next car, but it’s now being fined ten percent of the reduced time that it was already allocated.

There’s a bit more to it than that. The total wind tunnel allowance covers a period of 12 months, so Red Bull could – and probably will – front-end load its testing, to verify that its initial design works well by the first race of next season, which is in Bahrain on March fifth. And I wouldn’t be surprised if Red Bull starts off at the front of the pack. But where you’re likely to see degradation in performance is over the rest of the season, where Red Bull won’t be able to do as much testing as everyone else, so their modifications to the car won’t keep up.

This doesn’t mean that Red Bull won’t win the entire season, but it’s likely to be a much closer contest than it was in 2022.

So, to summarize, it appears that a lack of accounting controls within the Formula 1 teams might actually have an impact on the race results. Who ever expected that?