# Formula One Explained: How the Sport Works and Why It Costs So Much

> Formula One is the pinnacle of motor racing and a global sporting business. Here is how the championship works, how teams earn money and why budgets run into hundreds of millions.

*Section: Sports — By Tom Bennett (Sports Writer) — Published November 10, 2025 — 1 min read*

Canonical URL: https://dailyjunction.co.uk/sports/formula-one-how-it-works
Tags: formula one, f1, motorsport, sport, business of sport

## Key takeaways

- The Constructors and Drivers championships run simultaneously throughout the season
- Teams are allocated a portion of prize money based on historical performance — a system that entrenches inequality
- The budget cap (introduced in 2021) limits operational spending to $135m per team, excluding driver salaries and marketing
- Engine development remains uncapped, giving manufacturers a competitive advantage

## How the championship works

Formula One comprises two championships: the Drivers' Championship (awarded to the driver who scores the most points across the season) and the Constructors' Championship (awarded to the team whose two drivers score the most combined points). Points are awarded to the top 10 finishers in each race, with 25 for a win and 1 for 10th. A fastest lap point is also awarded under certain conditions.

## The commercial structure

Teams earn prize money from Formula One Group through the Concorde Agreement — the contract that governs F1's commercial terms. Prize money is distributed based on a complex formula that rewards historical performance, giving the most successful teams a structural financial advantage. This has historically made it difficult for new teams to compete with established constructors.

## Why it costs so much

Before the 2021 cost cap, top teams spent upwards of $400m per year on operations. The aerodynamics of a Formula One car represent the most complex applied engineering in professional sport; gains of fractions of a second per lap require thousands of hours of wind tunnel testing, CFD simulation and physical development. Driver salaries for top racers can reach $50m or more annually and are excluded from the cap.

## The budget cap revolution

The $135m operational budget cap (excluding driver salaries, marketing and certain other costs) introduced in 2021 was designed to reduce the gap between top teams and midfield constructors. Early evidence suggests it has compressed the competitive field, though policing the cap — which requires examining thousands of supplier invoices — proved more complex than anticipated, resulting in the FIA issuing penalties to teams that exceeded the cap in 2021.

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## Sources

- [BBC Sport](https://www.bbc.co.uk/sport)
- [The Athletic](https://theathletic.com)

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