Caponomics #101; How to Estimate a Players Cap Cost...................

**soulman** · 03-01-2012, 12:51 PM

As I read through various threads on who we may or may not go after in FA I often see members who are unfamiliar with how the cap works or cap estimates for players which may be unrealistic. It's all about how the deal is structured more so than the actual contract value.

We all read about the huge deals signed by top players but in many instances they will never receive the full value of the contract ergo the battles between player and management over the amount guaranteed and in what manner it is guaranteed. From the players perspective they want as much of the guaranteed money as soon as they can realistically get it and the teams objective is to make the deal as cap friendly to them as possible.

So here are the basic terminologies of contract structure and how they are accounted for on a cap cost basis. The cap cost is rarely the same as cash paid out to that player. In any given year the cap cost my be significantly more or significantly less than the monies received by the player.

Here we go;

Salary: A players salary is no different than yours or mine. It's his base pay for the year payable in 16 increments across the course of the season. One paycheck per game. 100% of his salary is charged against the cap at the beginning of the NFL year which is in March. If a player is cut the unused portion may be used for other signings or carried over until the next year. (see footnote*)

Signing Bonus: This is where teams can get very creative and often do. Although the signing bonus is paid in cash at the beginning of the contract the cap treatment is quite different. The team is permitted to amortize it in equal amounts over the life of the contract. In other words if a player receives a $12 signing bonus on a 4 year contract he's paid the $12 mil upfront but only $3 mil is charged against the cap in the first year and each of the three years following; 4 yrs x $3 mil each = $12 mil. This is the primary tool teams use to stretch their limited cap dollars more effectively when signing free agents from other teams or their own. (see footnote#)

Roster Bonus: This is just what it says. An annual bonus for making the 53 man roster. Although it is usually paid out in a similar manner to the players salary (1/16th each game) there are instances where that players contract calls for it to be paid in full at the beginning of the NFL year in March. This is why you'll see teams cutting still useful players who are deemed to be a "cap casualty" before the new year begins because a roster bonus is due and the team doesn't want to pay the cash or accept the cap consequences for a player who no longer fits their needs or may be in decline. Roster bonuses are charged at 100% of the amount of ther bonus in the year they are paid.

Workout Bonus: A small bonus, usually $100k max, for working out at team facilities or other acceptable facilities so that a player builds speed, strength or just maintains his fitness during the off season. This bonus is also charged 100% in the years it is paid.

Incentive Bonus: Paid for achieving a certain per-agreed goal. Examples would be; certain percentage of plays, number of receptions, number of td's, yardage gained, number of sacks, a Pro Bowl appearance, etc. They can be either ULTBE (unlikely to be earned) in which case they are only charged against the cap if earned and when paid the following year or likely to be earned (LTBE). Those constitute bonuses given for maintaining a certain level of excellence or reaching a goal that he been reached before. These bonuses are charged against the cap in year to which they apply but are credited back the following year if they go unearned.

For an example, promising Lance Briggs an incentive bonus for being chosen for the Pro Bowl would be LTBE because he's made it before on many occasions. Promising that same bonus to Nick Roach would be ULTBE since he has never been and isn't a lock to make in the future.

These are the basics of any NFL players contract although there are some twists and bends that can be used to also minimize a players cap cost in a given year or years. I won't go into those now and on top of that I don't claim to even be aware of all of them.

OK, we've talked about acquiring some high priced top tier FA talent like VJax or MWill and the operative thought is that we can't afford either let alone both. Actually the problem isn't signing both for 2012. The problem would come from the mushrooming costs of their compensation in later years. It's not all that hard to accommodate the costs of a huge contract in year one.

To create a viable example though let's use this one; We offer, and Mario Williams accepts, a 6 year contract for $90 mil with $45 mil guaranteed by a combination of Signing Bonus, Roster Bonus and Salary. So how do we structure this so although he averages $15 mil per year over the life of the contract his 2012 cap cost is only half ($7.5 mil) of that amount leaving us space to acquire other free agents.

Here's how we structure it; Of the $45 mil we guarantee $30 mil is paid upfront as a signing bonus. The other $15 mil will come as roster bonuses in later years or in the from a guaranteeing his salary in years 1, 2 and 3. His 2012 salary is $2.5 mil and their are no other bonuses paid or charged against the cap in 2012. So here's how we figure his 2012 cap cost.

Sal.= $2.5 mil
SB. = $5.0 mil (1/6th of his $30 mil Signing Bonus amortized over 6 years)

Total 2012 Cap Cost = $7.5 mil.

Why would he play for such a small 2012 salary? Because in addition to that we just handed him a check for $30 mil non-refundable even if he breaks his leg and can't play in 2012 or any other year as well. This is how players protect themselves and at the same time teams protect themselves against not being on the hook for more than a certain guaranteed amount. Plus the contract is extremely cap friendly in it's first year.

Costs will rise in ensuing years but with the expectation of the cap increasing and the contracts of other high dollar vets expiring those costs usually become manageable. So this is what the battle over contracts is all about. What players care about most is the sum guaranteed them and when they receive it whereas the team wants to minimize it's risk (guaranteed monies) and get the best cap structure for themselves possible.

I'd be willing to guess most of the Forte battle is over the amount guaranteed and in what manner it is guaranteed.

#Salary Footnote; A portion of a players salary may be converted into a signing bonus coincident with a contract extension. This is a tool for managing a high salary which may negatively impact the cap. Generally a short extension may be done with several years left on the original contract thereby creating a new one which allows for a portion of that years salary to be amortized over the remaining years of the new deal. This is what the Bear did with Urlacher's contract a few years ago.

*Signing Bonus footnote; If a player is cut or traded before the end of his contract any remaining unamortized amounts of his signing bonus will be charged against the cap in that year. Even though the player is no longer with that team there will still be a cap charge for him. This is what is referred to as "dead cap space".

Well this is the basics of how a players cap cost, or the more politically correct cap value, as the NFL likes to refer to it, is calculated. Hope this may be of some help to those of you doing mocks which include FA's as well as draftees or for those merely curious about this stuff works.

**Papa Bear** · 03-01-2012, 01:05 PM

Needs pictures.

Great post, Soul! I've slowly been catching on to a lot of this cap stuff while you and Windy have your cap debates, but this really helps with more of the details. Great stuff!

**soulman** · 03-01-2012, 01:31 PM

Originally Posted by Papa Bear

Needs pictures.

Great post, Soul! I've slowly been catching on to a lot of this cap stuff while you and Windy have your cap debates, but this really helps with more of the details. Great stuff!

Thanks PB. I try to share what I know about this stuff. I've been doing it for a long time but when I was away from the board for a while DB54 took it up and actually kept a running thread going on the current cap situation. He's gone now and I don't have the time to maintain a sticky that's ongoing but in all likelihood I can estimate the cap effects on almost any signing as long as I have the details of the contracts structure.

I'm not certain what Windy uses to make his projections in his mocks. Maybe he can explain that. I do know that some of those figures are probably inaccurate. Teams aren't throwing upfront money around like they used to for two reasons. 1) The cap is no longer increasing each year at the rate it did prior to 2010 so teams can't count on that to cover the needs of back-ended deals with monstrous increases in future cap costs. To many teams have been burned having too much "dead money" on their books when they have to cut a guy. and 2) Because of being burned whether by injuries or declining productivity too much upfront money leaves the team with no protection. They have money invested, too many unamortized signing dollars, and they have to pay some other player to replace the guy.

None of that helps them so teams have taken to giving smaller signing bonuses upfront and more money is deferred into salary increases or roster bonuses in later years. Even Pep's deal is structured that way to protect some of those dollars against a rapid end to his career.

As I said the key is the structure. Just because a guys deal averages $15 mil per year doesn't mean that's what hit's the cap every year. It's usually above of below that figure sometimes by a huge amount. Case in point. Pep's deal averages $14 mil per year but this year his cap cost is just $11.3 mil (leaves 2.7 mil to resign Izzy for another year as an example) but in 2010 when there was no cap limit his cap that year was $35 mil and change.

Over 50% of his contract has already been accounted for in it's first two years which to me is why we can afford to bring a guy like MWill in as long as ownership is prepared to put up the cash. If so, and George McCaskey said they would, then we can deal with the cap implications.

Glad you found this useful.

**short faced bear** · 03-01-2012, 01:32 PM

Thanks Soul. This should clear up the confusion you see sometimes on this.

**MPBears68** · 03-01-2012, 01:41 PM

Excellent explanation, Soul, thank you!

**WindyCity** · 03-01-2012, 01:48 PM

Originally Posted by soulman

Thanks PB. I try to share what I know about this stuff. I've been doing it for a long time but when I was away from the board for a while DB54 took it up and actually kept a running thread going on the current cap situation. He's gone now and I don't have the time to maintain a sticky that's ongoing but in all likelihood I can estimate the cap effects on almost any signing as long as I have the details of the contracts structure.

I'm not certain what Windy uses to make his projections in his mocks. Maybe he can explain that. I do know that some of those figures are probably inaccurate. Teams aren't throwing upfront money around like they used to for two reasons. 1) The cap is no longer increasing each year at the rate it did prior to 2010 so teams can't count on that to cover the needs of back-ended deals with monstrous increases in future cap costs. To many teams have been burned having too much "dead money" on their books when they have to cut a guy. and 2) Because of being burned whether by injuries or declining productivity too much upfront money leaves the team with no protection. They have money invested, too many unamortized signing dollars, and they have to pay some other player to replace the guy.

None of that helps them so teams have taken to giving smaller signing bonuses upfront and more money is deferred into salary increases or roster bonuses in later years. Even Pep's deal is structured that way to protect some of those dollars against a rapid end to his career.

As I said the key is the structure. Just because a guys deal averages $15 mil per year doesn't mean that's what hit's the cap every year. It's usually above of below that figure sometimes by a huge amount. Case in point. Pep's deal averages $14 mil per year but this year his cap cost is just $11.3 mil (leaves 2.7 mil to resign Izzy for another year as an example) but in 2010 when there was no cap limit his cap that year was $35 mil and change.

Over 50% of his contract has already been accounted for in it's first two years which to me is why we can afford to bring a guy like MWill in as long as ownership is prepared to put up the cash. If so, and George McCaskey said they would, then we can deal with the cap implications.

Glad you found this useful.

You are absolutely correct about Mario Williams what I am worried about in the plan of having a 7.5 million dollar cap hit is that it hurts the cap later on.

If Cliff Stien has a plan for the years when Mario Williams will be making 20 million dollars than I am all for it, but at some point in the contract we need to deal with the 90 million he is going to get paid.

With my contracts I try and split up the cap hit as evenly as I can witha gradual increase along the way. The guaranteed money is not all signing bonus it is guaranteed like Roster Bonuses.

Now the Bears may choose not to do that, because of expiring contracts and guys that they are going to release, but it scares me that we are going to be on the hook to Mario Williams for a 20 million dollar salary for a couple of seasons.

My perfect scenario [6 years 90 million/30 guarantees]

We could also include roster bonuses that do not lock us if we cut him.

Cap Hits

Year 1: 7.5 Million

Allows us to be active in free agency.

Year 2: 12.5 Million

We should not need a lot of free agent help this season.

Year 3: 15 million

Urlacher and Briggs could be off the books.

Year 4: 18 million

Peppers will be off the books.

Year 5: 18 million

I would start to think about releasing him and saving 8 million dollars or extending him to expand the cap hitable years.

Year 6: 19 Million

Only 5 of this is amortized signing bonus and we could cut him without a big hit and a huge saving.

**soulman** · 03-01-2012, 02:05 PM

Originally Posted by WindyCity

You are absolutely correct about Mario Williams what I am worried about in the plan of having a 7.5 million dollar cap hit is that it hurts the cap later on.

If Cliff Stien has a plan for the years when Mario Williams will be making 20 million dollars than I am all for it, but at some point in the contract we need to deal with the 90 million he is going to get paid.

With my contracts I try and split up the cap hit as evenly as I can witha gradual increase along the way.

Now the Bears may choose not to do that, because of expiring contracts and guys that they are going to release, but it scares me that we are going to be on the hook to Mario Williams for a 20 million dollar salary for a couple of seasons.

My perfect scenario [6 years 90 million]

Year 1: 7.5 Million

Year 2: 12.5 Million

We should not need a lot of free agent help this season.

Year 3: 15 million

Urlacher and Briggs could be off the books.

Year 4: 18 million

Peppers will be off the books.

Year 5: 18 million

I would start to think about releasing him and saving 8 million dollars or extending him to expand the cap hitable years.

Year 6: 19 Million

Only 5 of this is amortized signing bonus and we could cut him without a big hit and a huge saving.

Well it's unlikely we'd have that big of a cap hit in one year and if we do 5 years down the road the cap will in all likelihood be much greater so on a relative basis it may have less effect than a $15 mil hit does today. Well structured deal usually do have increases as time goes by but as I pointed out there are a few clever ways to deal with a problem if and when that happens.

My note on what you can do with a salary that's tough to swallow is an example. Salary can be converted into a bonus which can be amortized. Let's say in year 4 of a 6 year deal the salary spikes to oh, $18 mil. You don't want all $18 mil against the cap so you give him $9 mil as a signing bonus an extend the contract one more year. So instead of an $18 mil cap hit your have $9 mil for his salary, $2.25 mil for the new bonus and whatever the annual figure is for amortization of the original signing bonus. Let's just say that's $3 mil OK. So by doing this you save $3.75 mil against the cap that year and you may never pay out that last year anyway.

If a team is careful and has a decent forecast of future cap expenses you can do a lot more than folks think can be done. Cliff Stein is one of the best at it so I'll just say if it can be done it will be. The way they did Pep's deal was a stroke of genius that assures that we don't get hit too hard towards the tail end of his deal and have to release him. You can either pay now or pay later but there are many ways to optimize it for any given situation.

That's why any assumption we make may be so far off base that it can be useless. That's why I don't do those contract projections you do. It's basically a waste of my time as far as cap accuracy is concerned.

**WindyCity** · 03-01-2012, 02:35 PM

My ideal contract for Robert Meachem in one of my mock offseasons

5 years 25 million/15 guaranteed [10 SB/5 RB]

Year 1: 2 Salary/2SB [4]

Year 2: 2 salary/ 2SB [4]

Year 3: 2 salary/ 2 SB/ 1 RB [5]

Year 4: 2 salary/ 2 SB/ 1.5 RB [5.5]

Year 5: 2 salary/2 SB/ 2.5 RB [6.5] Likely Cut

**WindyCity** · 03-01-2012, 02:35 PM

Originally Posted by soulman

Well it's unlikely we'd have that big of a cap hit in one year and if we do 5 years down the road the cap will in all likelihood be much greater so on a relative basis it may have less effect than a $15 mil hit does today. Well structured deal usually do have increases as time goes by but as I pointed out there are a few clever ways to deal with a problem if and when that happens.

My note on what you can do with a salary that's tough to swallow is an example. Salary can be converted into a bonus which can be amortized. Let's say in year 4 of a 6 year deal the salary spikes to oh, $18 mil. You don't want all $18 mil against the cap so you give him $9 mil as a signing bonus an extend the contract one more year. So instead of an $18 mil cap hit your have $9 mil for his salary, $2.25 mil for the new bonus and whatever the annual figure is for amortization of the original signing bonus. Let's just say that's $3 mil OK. So by doing this you save $3.75 mil against the cap that year and you may never pay out that last year anyway.

If a team is careful and has a decent forecast of future cap expenses you can do a lot more than folks think can be done. Cliff Stein is one of the best at it so I'll just say if it can be done it will be. The way they did Pep's deal was a stroke of genius that assures that we don't get hit too hard towards the tail end of his deal and have to release him. You can either pay now or pay later but there are many ways to optimize it for any given situation.

That's why any assumption we make may be so far off base that it can be useless. That's why I don't do those contract projections you do. It's basically a waste of my time as far as cap accuracy is concerned.

The nice part of being a Bears fan is we have one of the best capoligists in the league in Cliff Stien.

**soulman** · 03-01-2012, 05:48 PM

I think we have a decision to make fairly soon about who to pursue at WR. I really hope they don't overlook Eddie Royal. He's still under the radar and he could well turn out to the biggest bargain out there. Of the other I'd look at Meachem and push a WR back a bit farther in the draft or look at Wayne for a two year gig and then draft a WR early and work him into the mix. Drake may be a poor coach but I'll bet Reggie could show the rookie and all the rest of them some moves. He's always been a master of getting open. At any rate that's how I roll.

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