Contract & Cap Basics 101

[Rubes]

I am by no means an expert in how NFL contracts work, or for that matter how the cap works. I especially have a difficult time with the concept of "dead money". Be that as it may, I thought I would put this together as a primer on the basics of how NFL contracts work and how they impact the cap, and see what others have to say with respect to corrections or further suggestions. It's also partly to make sure I have this right. But at least we could have some basic info out there to help us understand a contract and to know if it's a good one or not.

There are two basic components to an NFL contract: base salary and bonuses. Base salary is the amount of money paid to the player for a specific season of play, while bonuses can take multiple forms: signing bonuses, roster bonuses, workout bonuses, incentive-based bonuses, and so on.

Base salaries are non-guaranteed amounts specified for each year of a contract. Recall that NFL contracts are not guaranteed, which means that a player can be cut and the remaining base salaries are no longer owed to the player. (There are some specifics about when a player is cut that affects this, such as cutting a veteran player after the first game of the season, but I don't fully understand those specifics and won't get into them here.)

Let's use a simple example of a 4-year "back-loaded" contract which specifies base salaries as follows:

Year 1: $1 million

Year 2: $2 million

Year 3: $4 million

Year 4: $7 million

So this would be considered a 4-year, $14 million contract, with an average salary of $3.5 million (averages don't mean anything when it comes to contracts, but some people like to use it as a measure of one player's contract vs another). But, as you can see, $11 million of the $14 million is in the final two years of the contract, which is what makes it "back-loaded". If the player was cut after Year 2, then he would miss out on those $11 million. This is why huge contracts aren't often what they seem, because the big numbers are often back-loaded, and the player is likely to be cut before he ever sees the big money.

Now, let's say the player gets a decent signing bonus, like $6 million, which is given to the player at the time he signs the contract. This is what we refer to as "guaranteed" money, since the player will get that entire amount no matter what happens to him. Signing bonuses are good for both players and teams since the player gets all the money, and the team gets to spread the entire amount over the full length of the contract (even though it's all paid right up front). So in this case, the $6 million signing bonus amounts to $1.5 million per year for each of the four years.

So the total contract at this point is a 4-year, $20 million contract, with $6 million guaranteed, or you might also hear it's an average of $5 million per year. Often, teams will also fully guarantee the first year's base salary, so in this case it would be $7 million guaranteed.

So the cap hit for each year of this contract is:

Year 1: $1 million (base) + $1.5 million (signing) = $2.5 million

Year 2: $2 million (base) + $1.5 million (signing) = $3.5 million

Year 3: $4 million (base) + $1.5 million (signing) = $5.5 million

Year 4: $7 million (base) + $1.5 million (signing) = $8.5 million

That's a pretty cap-friendly deal, since the player only costs $6 million for the first two years, and only $11.5 million for three years. He can be cut after Year 2 or 3, saving up to $11 million of base salary if needed.

What happens if he does get cut after Year 2? The team would not have to worry about the $4 million on the cap for Year 3 and $7 million on the cap for Year 4. However, they would still be on the hook for the $1.5 million bonus amount in each year, which is what adds to the concept of "dead money" -- they would have $1.5 million contributing towards the cap in Years 3 and 4 for a player who is no longer on the team.

What happens if the player gets traded after Year 2? The original team would be off the hook for those $11 million in Years 3 and 4, but they would still be on the hook for those $1.5 million each of those years, so it would still be "dead money". The new team would adopt the existing contract, but they are only responsible for the base salaries in Years 3 and 4. The player would still be expecting to receive those $11 million over those two years -- but again, that is base salary, so it's not guaranteed money; the player could still be cut by the new team and he would receive nothing.

Also, the new team may not be willing or able to fit that money under the cap. So, what many teams do is to convert that base salary into bonus (or guaranteed money). Let's say the new team converts $6 million of that $11 million into a bonus (all $4 million from Year 3 and $2 million from Year 4). The player instantly gets those $6 million (since it's now guaranteed), and the team gets to spread that $6 million over the remaining 2 years of the contract, or $3 million per year. The rest ($5 million) remains base salary. So the contract and cap hit for the new team now becomes:

Year 3: $0 million (base) + $3 million (signing) = $3 million (was $4 million)

Year 4: $5 million (base) + $3 million (signing) = $8 million (was $7 million)

So the total amount of the contract is still $11 million, but the player gets most of it up front as guaranteed money, and the team gets a little bit of cap relief in Year 3. However, if the player gets cut during the contract, it creates more potential "dead money" for the team because of that guaranteed money.

Another approach for the new team is to extend the contract, while also converting base salary into bonuses. Taking the same scenario if the player was traded after Year 2, the new team may extend the contract by a few more years, while converting a chunk of the original base salary into bonus, and adding a bit more bonus on top of that.

Let's say the new contract extends the original contract by 2 years, so the player now has a four-year contract with the new team. Let's say they convert $6 million of the remaining original $11 million base salary into bonus ($2 million from Year 3 and $4 million from Year 4) and add another $4 million bonus on top of that, for a total signing bonus of $10 million, which is now spread out to $2.5 million per contract year. With some hypothetical new base salaries for Years 5 and 6, the contract now looks like:

Year 3: $2 million (base) + $2.5 million (signing) = $4.5 million

Year 4: $3 million (base) + $2.5 million (signing) = $5.5 million

Year 5: $4 million (base) + $2.5 million (signing) = $6.5 million

Year 6: $5 million (base) + $2.5 million (signing) = $7.5 million

The new contract would now be announced as a 4-year, $24 million contract (or $6 million per year), with $12 million guaranteed (presuming the first year's salary is also guaranteed). The player gets a ton of money guaranteed up front ($10 million), while the team gets to spread out the contract to a reasonable cap hit each year, at the risk of having a higher amount of "dead money" if the player eventually is released.

So that's what I've got. There's obviously more that could be added, like the workout bonuses or incentive-based bonuses, but I think these are the basics. The cap implications become a bit more obvious when we start talking about really large contracts, like McCoy's, where the base salaries are initially really high; converting those high base salaries into signing bonus has a much more pronounced effect on the cap hit each year, but again, increases the risk of "dead money" should the player be released. There's also a lot of talk these days about contracts being made "fully guaranteed", so that there is no risk to the player of being cut. This would take some work to plan it out so that base salary and signing bonus are balanced appropriately such that teams aren't completely killed either by the cap hit or possible dead money, but the idea is that these fully guaranteed contracts would go to high-profile players that have little risk of being cut and therefore killing teams with dead money.

[Deranged Rhino]

Thanks for this,

[Virgil]

Is there any way to make the guaranteed money come off the books in different increments, or does it have to be averaged out?

 

Basically, could I pay the bonus all in the first year and nothing the remaining years?

[Big Turk]

No

[NoSaint]

Is there any way to make the guaranteed money come off the books in different increments, or does it have to be averaged out?

 

Basically, could I pay the bonus all in the first year and nothing the remaining years?

Just make it a roster bonus instead of signing. Signing bonus is the only amortized bonus.

[Nanker]

Nice work Rubes.

Now where can I sign to get that $10 million guaranteed?

[Rubes]

Is there any way to make the guaranteed money come off the books in different increments, or does it have to be averaged out?

 

Basically, could I pay the bonus all in the first year and nothing the remaining years?

 

Either as a roster bonus, as suggested, or just as guaranteed base salary in the first year.

 

 

Nice work Rubes.

Now where can I sign to get that $10 million guaranteed?

 

I'll get to work on the contract.

[BillsVet]

Clump was outstanding describing the cap years ago.

 

Miss his posts.

[Rubes]

Since there's always a test at the end, the challenge for you now is to

 

1. Describe how we extended and restructured McCoy's contract so that we end up paying him $16 million this year, but his cap hit is only $5.6 million, far less than it was before the contract re-do, and

 

2. Describe how much of his new contract is guaranteed money, and how that shakes out.

Edited March 8, 2015 by Rubes