Understanding Contracts & Cap Implications

It’s the time of year when teams are releasing players whose contracts have become cumbersome and restrictive. Words like “dead money” and “proration” are thrown around in excess yet few seem to really understand what they mean. This will be a very simplified explanation of the basic concepts that are necessary to understanding the implications when a contract is terminated.

For clarification: The terms “cut,” “waived,” and “released” are all interchangeable and mean the same thing. There really is no difference except the timing of when they are used. Cut is typically used around the time of training camp. Waived is used primarily in season. Released is often used after the season.

Salary

When a player signs a contract there are multiple ways that he can be paid. Everyone knows what a salary is. Salaries are paid out during the 17-week season in either weekly or bi-weekly checks just like you receive from your employer. Players can choose to have their salaries paid out over the length of the full year but few rarely choose that option. For cap purposes, salaries are very simple to calculate. Whatever is paid out counts versus the cap. If a player is waived in week 4, his first 4 weeks salaries count against the cap. The contract of the player who replaces him begins counting when he’s added to the roster. Salaries are only paid out if the player is on the roster.

Signing Bonus

Signing bonuses are exactly what they sound like. It is a bonus that is paid directly to the player at the time of signing his contract. For cap calculation purposes, the signing bonus is “prorated” over the life of the contract. This simply means that the amount of the signing bonus is spread out over the years of the contract evenly. So a $5 million signing bonus on a 5-year contract will count $1 million per year against the cap. Again, this is only for cap purposes – the player has already received this money. Signing bonuses are guaranteed and cannot be recouped except in extremely rare circumstances (think Atlanta vs. Mike Vick). The max proration for a bonus is 5 years. This is done so that teams can’t sign 10 year contracts to help alleviate the bonus hit.

Roster Bonus

This is a bonus that is paid on a specific date if a player is on the roster on that date. This money counts against the cap for the year in which it is paid and is NOT prorated like a signing bonus.

Guaranteed Money

This is this holy grail of money for players and agents. Guaranteed money is the money that a player is guaranteed (duh) to get no matter what happens. Guaranteed money includes both salary and any/all bonuses. Guaranteed money has no direct impact on the salary cap. It is simply a term used to describe the money that a player is sure to receive from his contract.

What Happens When A Contract Is Terminated

If a player is traded, his contract (in terms of the cap) is treated like it has been terminated, except for one difference which I’ll explain in a second. I discussed what happens in terms of a salary when a contract is terminated. The big focus here is on the signing bonus. When a player is released, any prorated bonus that has not been counted against the cap is “accelerated” to the current year’s cap. For example, a player signs a 5 year contract with a $5 million signing bonus. That signing bonus is prorated over those 5 years versus the salary cap. Put another way, it counts $1 million each year of the contract for 5 years, for a total of $5 million. If that player is cut after his 2nd year of the contract, 2 years (and $2 million) of that signing bonus has been counted against the cap with 3 years and $3 million unaccounted for. That $3 million is then “accelerated” into the current year. This is where the term “dead money” comes into play. Dead money is “money” that is counted against the cap for a player who is no longer on the roster.

If a player is guaranteed money and is released before receiving all of his guaranteed money, the money he hasn’t received is counted against the cap immediately, similar to a signing bonus being accelerated. One major difference between bonuses and guarantees is that guarantees can be traded/transferred while signing bonuses can’t. If a player has unpaid guaranteed money and he is traded, the team he is traded to is then responsible for any unpaid guaranteed money. The same can’t be said for signing bonuses. That money has already been paid and for cap purposes the signing bonus is accelerated into the current year.

“June 1″ Rule

This is a very important rule that doesn’t get enough publicity. Teams have the opportunity to declare 2 cuts as their “post-June 1″ cuts each offseason. For these players, instead of their cap hit coming all at once, it is divided up over the next 2 years. For example, if a player is released and is going to have $8 million accelerated into the current year, he can be designated as a June 1 cut and will count $4 million against the cap this year and $4 million in the following year.

This is an avenue that teams in “salary cap hell” can use to save themselves from having to cut a good player.

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5 Responses to Understanding Contracts & Cap Implications

  1. @rumless says:

    First.

  2. Professor Frink says:

    Good summary, I would just like to add a few things commonly found in contracts you didn’t touch upon.

    First, not all guarantees are the same. What you discuss is fully guaranteed money, but their are also what I like to call “half” guarantees. A player can get money guaranteed, but it would only be for skill. If his skills erode, the team is still obligated to pay him. However, if that player has a career-ending injury, the team can release him without further financial obligation. It also works the other way, a player could get an injury guarantee, but is at risk at getting cut for declining ability.

    You also didn’t mention option bonuses. Those are important because it allows teams to prorate money they pay in the middle of the contract. Joe Flacco’s new deal likely has an option bonus in the second year. If he signed a six year deal, but there is an option bonus of $25M due in 2014, that money gets accounted for over years 2-6. If the Ravens decide they don’t want to pay him that (extremely unlikely) then the contract is terminated, Flacco becomes a free agent, and all the signed bonus money gets accelerated and is dead money in 2014.

    I’ve been following you on twitter since your early days (one of your first few hundred) and I’m very excited to see what you do with the blog. I look forward to reading more of your work.

  3. Pingback: Contracts, Cap Implications, and Restructuring | Pro Football Hot Reads

  4. JetsWest says:

    This is a great idea for a blog. Nice work.

    You explained what happens if a player is cut/waived/released or traded. How does it work if a player sustains a career-ending injury? If Joe Flacco destroys his right arm at the Joe Flacco Charity Bowling Tournament next week, will the Ravens face a $52 million cap acceleration into the 2013 season? Or is there some form of relief on the part of the league if the reason for dumping a player is for injury? And if the latter is correct, should poor Mark Sanchez be looking over his shoulder for fear of being on the receiving end of a Tanya Harding-type situation?

    At some point, I’d also like to hear how cap overages are treated by the league. With so many moving pieces, I’m sure teams must go over from time to time. What happens then? Is there a fine? Draft losses?

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