The “Basic Biology” of NFL contract negotiations – 101

“After further review” I’m back to dissect the particulars of an NFL contract and the corresponding negotiations that go with it.  More like “haggling” really.

I mentioned in an earlier post, “Definitions of the complexities of contract negotiations” five primary areas of player compensation; signing bonus SB, roster bonus RB, option bonus OB, base salary P5, incentives.  Somewhat simplified, these give you an understanding of what makes up a standard NFL contract and where the actual “negotiating” takes place.

Many have made efforts to explain the apparent “unexplainable”.  Perhaps my version will enlighten those that have yet to firmly grasp.

NFL GM’s and “Capologists” are tasked with looking at the impact of contracts from two very distinct (yet complimentary) angles; CASH and CAP.  Cash is real, cap is somewhat imaginary.  Agents must help work with club cap constraints, but are focused primarily on maximum cash attainment.

Let’s break down an example;

YR1 YR2 YR3 YR4 YR5
SB $15M $3.75M $3.75M $3.75M $3.75M
P5 $5M $5M/$900K $5M $5M $5M
RB  $5M $5M/$1.66m $1.66M $1.66m
OB  $4.1M $1.025M $1.025M $1.025M $1.025M
LTBE $100K $100K $100K $100K $100K
$500K $500K $500K $500K $500K
CASH To Date $20M $25M $35M $40M  $41.2
CAP $8.85M $6.275M $11.535M $11.535M  $8.285
 Year 1

  • Player signs an NFL contract for 4 years.
  • Receives a SB of $15M and has a P5 of $5M.
  • Has two incentives, Off-Season workout participation (90%) and Playtime (80%), which are valued at $100K and $500K respectively.  This provides an opportunity for an extra $600K.

Most clubs won’t value “unearned incentives”, while agents will.  It’s the difference of calling this a $40M deal versus $42.4M.  Prime example of the same contract being valued two different ways.

The CAP  charge ($8.85M) is simply ¼ of the $15M, $100K for the Off-Season (always valued “likely” & therefore charged), $5M P5 and possibly $500K if he reaches 80%.  This is reconciled at year’s end and either added or subtracted accordingly.  Cash to date ($20M) with an additional $600K earning potential.

Year 2

  • P5 of $5M
  • The club and agent agree on the 2nd day of the League Year (LY) to turn $4.1M of P5 into a guaranteed OB for an additional year (YR 5) added to contract.  The club has committed to the player in guaranteeing the $5M, the player has provided CAP room through proration of the OB over 4 years.
  • Off-Season workout participation and Playtime provide an opportunity for an extra $600K.

The P5 isn’t guaranteed by itself.  The club commits early (2nd day of LY) to the player in order to gain CAP room and extend the contract an additional year. What started as 4 years is now 5 by ensuring the $5M base.  The CAP charge ($6.275M) is ¼ of the original $15M SB, ¼ of the $4.1 taken from P5 for OB that added a year, remaining $900K of P5, $100K for Off-Season (same rules apply), $500K for Playtime (becomes “likely” as for this example – earned Year 1).  Cash to date ($25.6M) with $600K potential.

Year 3

  • P5 of $5M
  • The club and agent agree to a RB on the 2nd day of the LY of $5M (which if earned is agreed to convert to SB).
  • Off-Season workout participation and Playtime provide an opportunity for an extra $600K.

The P5 is not guaranteed but the RB of $5M forces the club to make a decision on the player before Year 3.  The RB becomes guaranteed when earned and is then converted to SB for CAP proration purposes (1/3 of $5M counts).  $100K counts vs the CAP as well and the $500K falls off for this example – player did not reach 80% in Year 2.  CAP charge ($11.535M), Cash to date ($35.6) with $600K potential.

Year 4

  • P5 of $5M
  • Proration of ¼ of original $15M, ¼ of $5M OB, 1/3 of $5M RB
  • Off-Season workout participation and Playtime provide an opportunity for an extra $600K.

The P5 is not guaranteed and nothing is protecting it like the OB and RB in the preceding years.  CAP charge ($11.535M) accounts for $100K in Off-Season, but player missed Playtime again (no $500K charge).  Cash to date (40.6M) with $600K potential.

Year 5

Player has reached the end.  Club no longer has plans for on the roster and will release.   No amounts are guaranteed in Year 5 and the current “likely” CAP charge ($8.285M).  That includes P5, ¼ of the original OB, 1/3 of RB & both incentives (for example purposes earned in Year 4).  Original SB was already accounted for in previous 4 years.

Player earned the $600K in Year 4 and total Cash ($41.2M)  – not the $40M or $42.4M reported at signing.

Final Ramifications

  • Release prior to start of LYFull amount of remaining proration comes forward for end of YR 4 reconciliation ($2.685M)

Usually done to avoid any start of the LY guarantees

  • Release after start of LY and prior to June 1 – Carry any and all remaining proration ($2.685M) on YR 5 CAP.
  • Release after June 1 – Carry current YR 5 proration ($2.685M), remaining years (if any) count towards following YR

Usually done for current year CAP relief.  None for this example.

QUESTIONS?

 

 

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