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Living on a budget: The basic principles of the NFL salary cap

Foundational terminology to know how not to go broke

The National Football League has a hard salary cap.

It is not a suggestion or a speed bump on your way to buying a championship. It is not a minor inconvenience to a franchise flush with money and a prohibitive anchor to teams with tighter budgets. It is the single most important method by which the league helps ensure competitive balance and the continued popularity of the sport. It helps make “any given Sunday” a real phrase instead of a tired cliche.

With that cap comes rules and terminology and structure of which many football fans may not be aware. We’re going to go over some key pieces of foundational information that will help Bills Mafia (and anyone else who may be reading this) establish an appropriate baseline for understanding the finances of the league and their favorite franchise.

NOTE: this article is intended to be read alongside this week’s episode of “The Nick & Nolan Show” podcast on the Buffalo Rumblings podcast network.

How a cap hit is determined

The total “cap hits” of all the contracts a franchise has in a given year (plus any “dead cap”) cannot be greater than the salary cap. That is the first rule of the salary cap and it is understood through the name. The cap hit of a particular contract in a particular year is not the average annual salary that is reported often after a contract is signed, but rather, a sum:

Player salary for that year as specified in the contract
that year’s portion of the prorated signing bonus
roster and workout bonuses
cap hit

There is also a matter of likely to be earned (LTBE) and not likely to be earned (NLTBE) incentives that matter for the salary cap in a given year, but for the purposes of this article, we will keep it simple.

Let’s break down each part that makes up a cap hit:

Player salary for that year
The easiest and most straightforward of the pieces. When a player signs a contract, the salaries each year don’t have to be equal and often aren’t. In an example of four years, $40 million, the salaries each year are not likely to break down as $10 million year one, $10 million year two, $10 million year three, and $10 million year four. It may be more likely that the salaries are $8 million year one, $12 million year two, $12 million year three, and $8 million year four. Either arrangement would still constitute a four-year, $40 million deal.

That year’s portion of the prorated signing bonus
When this fictional player signed his fictional four-year, $40 million deal, he got a signing bonus of $12 million. This entire $12 million is not applied to the cap in the year the deal was signed but, rather, is prorated over the course of the entire contract. In this case, each year of the contract would have a $3 million signing bonus proration that is applied to the formula to determine cap hit ($12 million divided by 4 years = $3 million per year).

Roster and workout bonuses
Don’t brush over these as being unimportant. One of the ways savvy cap managers will avoid the proration of a large signing bonus is by applying a roster bonus in the first year to be able to pay the player a large amount of money up front. This is the case with Cole Beasley’s contract with the Bills, which contains a $6 million signing bonus but an almost $3 million roster bonus in the first year (2019). Workout bonuses can be used as a disincentive to hold out, with Darrelle Revis’s well-publicized New York Jets contract famously having a $1 million workout bonus to make sure he was present. Both roster and workout bonuses count towards the cap hit of a contract.

Why does the construction of the contract matter?

I mentioned above that smart front offices might install larger roster bonuses to avoid carrying the proration of a large signing bonus into the later years of the deal. Why would they want to do this?

The ability to move on from a player is important to roster flexibility.

If a team cuts or trades a player, the remaining proration of that player’s signing bonus accelerates into the current year and is all taken on by the franchise at once against the cap. This phenomenon contributes to what is known as “dead cap.” You may have heard Brandon Beane talk about this upon his arrival to the Bills and for a year or two afterwards. One of the ways to quickly accumulate dead cap is by signing players like Cordy Glenn and Marcel Dareus to long-term deals and then trading them within two years of the signing. In addition to having dead cap in these circumstances, the team is still on the hook for any salary that is guaranteed to the player in this situation. (Salaries can be guaranteed for skill, cap, injury, two of those, or all of those—in which case that salary is considered “fully guaranteed.”)

Let’s restructure

One of the ways teams will occasionally free up cap space that has been utilized for player salaries or been eaten up by dead cap is by “restructuring” a current player’s contract. It is important to lead with one item: RESTRUCTURES ARE NOT PAY CUTS. They might be in some rare cases, but oftentimes the narrative response from a fan base around news of a restructure is that the player has done the team a great service by agreeing to restructure their deal to help the team navigate its salary cap. This is an absolute farce. There are many ways to restructure a deal, but let’s go over what’s commonly called a “simple restructure.”

A “simple restructure” is a conversion of a portion of a player’s base salary for a contract year into a signing bonus. In our example outlined above, our fictional player has a $12 million base salary in year three of the deal. The team may approach the player with a restructure and take $10 million of his $12 million salary, convert it into a signing bonus and pay the $10 million to that player at the time of restructure. That player would then get a salary of $2 million for that year and the signing bonus they just received would be spread over the remaining two years of the deal.

Previously, that player’s cap hit in the third year would have been $15 million ($12 million for the salary plus $3 million for the proration of the initial signing bonus of the four-year deal). After the restructure, the player’s cap hit is $10 million ($2 million in salary, $3 million for the proration of the initial signing bonus over four years, and $5 million for the proration of the restructured signing bonus over the remaining two years).

However, that player’s cap hit in the final year of the deal was previously $11 million ($8 million in salary plus $3 million proration of the initial signing bonus). It is now $16 million ($8 million base salary, $3 million from the proration of the initial signing bonus of the four-year deal, and $5 million for the proration of the restructured signing bonus done in the third year).

You’ll notice that the bill always comes due. Before the restructure, the player’s cap hits were $15 million and $11 million. After, the cap hits are $10 million and $16 million. The same $26 million counts against the cap over those two years, but front offices around the league rely on kicking the can down the road in the hopes that the NFL’s rising salary cap will help turn a bad situation into a good one. It often does, and while restructuring contracts provides present cap relief at the cost of future cap and future flexibility, it is an important tool to allow front offices to be aggressive with their money when the opportunity arises.