The Art of NFL Contracts Part 3: Eight Things to Keep in Mind

Eight important ideas and concepts that drive contracts and create cap space in NFL negotiations.
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This is Part 3 of a multi-part series here on Arrowhead Report. To read earlier parts of The Art of NFL Contracts, click here for Part 1 and click here for Part 2

Many truths about cap space management and NFL contracts become apparent after someone elevates their understanding of basic contract structures. In Part 3 of “The Art of NFL Contracts,” we will go over some of the principles of contracts and team-building that become apparent. With this knowledge, fans can make more informed opinions about teams and their financial standing.

1. Cap goes up, contracts go up

Without fail, many fans and pundits alike respond to new contracts every year with disbelief as it pertains to the amount of money given out. Words like “overpaid” are used when describing some freshly-inked contracts every year.

The reason that this line of thinking requires a more critical look is because, proportionally, contracts have remained relatively stable over the last decade. Since 2013, the cap has increased from $122.1 million to $198.6 million, an average of $10.9 million per year. This is a drastic change in only seven offseasons, and that increase has been reflected in the money handed out in contracts. But has it been reflected in the percentage of cap space that contracts have taken up?

In looking at the percentage of cap space that contracts occupy by average per year — which is calculated by the average cost of the contract per year divided by the total cap space for the year — one can see what has happened to contracts. The results are surprising, as most positions have not seen major changes over the last decade. An elite defensive end’s contract in 2013 takes up around the same amount of the cap on a per-year basis as a defensive end in 2020.

An example of this is Mike Wallace, who was given a $12 million average per year contract in free agency in 2013. In looking at this contract in terms of average per year of the cap, that was 9.7% of the cap of $123 million that year.

In 2015, Demaryius Thomas signed a 5 year/$70 million contract in the offseason, which was for $14 million per year. When divided by the cap of $143 million, that equals 9.7% of the 2015 cap.

To compare to recent times, Antonio Brown signed an extension of $16.7 million average per year in 2019, which was 8.8% of the cap of $188 million that year.

A final comparison to recent times is that Julio Jones signed an extension in 2019 that brought his average per year, including 2019, to $18.4 million, which was 9.7% of the 2019 cap. Even looking past 2019, extrapolating Jones' deal past 2019 the $20.5 million average per year into the projected 2020 cap is 10.3% of the cap.

Even with contract payouts increasing in the last decade, the actual space taken up by paying these premium players has not changed much.

2. With the new CBA signed, contracts are about to look ridiculous at first glance

In general, this would be true, but COVID-19 might change the landscape drastically. Keep that in mind.

The new CBA could lead to some outrageous contracts in the near future.

With the CBA signed, the players will get up to 48.8% of the revenue share. 48% is guaranteed and will start in 2021. This means a lot of things for players, and the most direct meaning is that player contracts are about to balloon, not yet accounting for how the Coronavirus pandemic could change things.

As pointed out in the above point, contracts usually stay consistent in the percentage of cap space that contracts occupy by average per year. What that means for the new revenue share is that as the cap jumps $20 million a year, contracts will follow. Teams already know this fact and will write contracts before even seeing this increase in revenue to bank on that jump in cap space.

Don’t be shocked at some of these cap hits for new contracts in 2022 and 2023 if teams see normal revenue in 2020. The money given out will not be as immense after the cap has jumped $60 million in 3 years.

3. Unused cap space carries over to the next year

The Chiefs had $22.3 million in cap space at the end of 2019. The NFL lets teams choose a portion of the previous year's cap space to roll over. When adding the 2020 set cap space to the Chiefs’ rollover money, that gives the Chiefs $198.6 million + $22.3 million = $220.9 million in cap space to pull from. One must remember this fact when future cap space is cited in any capacity.

4. Players very rarely, if ever, earn the total amount of money on their contracts

The reason for this phenomenon was explained in Part 2 of this series, and it’s tied into guaranteed money.

There is very little dead money in the last few years of NFL contracts if they are long term deals. Guaranteed money is usually the only safety net players have against being cut, so unless the player has leverage, they will have to be content with the fact that they are really getting a three- or four-year deal when they sign for five years.

So when the next five-year/$100 million contract is signed, remember that the player will not see a lot of the money in the deal unless they were able to fit guaranteed money late in the deal.

5. Teams with low cap space can still sign free agents

“With what cap space?” is a common phrase uttered around free agency when teams that were seemingly low on cap space sign high-profile free agents to large contracts. The reason this is possible was also shown in Part 2 of this series.

Sammy Watkins’ contract structure showed why this contract is possible. While Watkins was one of the top contracts in free agency that year, the cash strapped Chiefs were able to afford Watkins due to structuring his deal so year one only had a $7.9 million cap hit.

One thing teams will need to be cognizant about when it comes to contracts like these is making sure the years with high cap hits later in the deal are properly accounted for. This does not change the fact that teams that are strapped for cash in one year can still sign big-name free agents, a fact that many are surprised by each year.

6. Guaranteed salary is traded with the player, the prorated signing bonus is not

Ever wonder how trading a player nets a team more cap savings than cutting the player? This is why.

When a player is traded, the team receiving the player takes on the base salary of the player. Because of this, teams can offload base salary guarantees by trading a player. The same cannot be said of the signing bonus, as teams are on the hook for this money no matter what.

7. The fifth-year option for first-round picks is not cheap, but still useful

Any contract talk in relation to first-round picks will always mention the option that comes with a first-round pick contract. While the extra year of control is very nice for these first-round picks, this extra year of control does not come cheap.

For top-10 picks, the salary for their option year will be the average of the top 10 contracts in the year prior to the option year at the player’s position. For picks 11-32, the salary for the option year will be the average of the third-25th ranked contracts at the players' positions.

While this option before was only guaranteed for injury until the option year, under the new CBA, these options will be fully guaranteed.

Unlike the four cheap years that rookie contracts provide, the fifth-year option year is more in line with current contracts and therefore more expensive. The real value in this option is the year of control.

8. Players with less than four accrued seasons in the NFL basically have no contract rights

If a player is set to become a free agent but doesn't have more than four accrued seasons in the NFL, they will not become a normal free agent. If a player has less than three accrued seasons, then they are considered an ERFA (Exclusive Rights Free Agent). Basically, what happens in this situation is the team chooses whether they keep the player on a close to veteran-minimum contract. The player has no say in this matter. Fun stuff huh?

If a player has exactly three accrued seasons they are considered an RFA (Restricted Free Agent). This is slightly different in the way that teams now have different tenders to put on the player: First-round, second-round, and original-round tender. The three stages carry three different monetary costs, with the first-round tender being the most expensive. When a team tenders a player, that means other teams can still try and sign the player. The original team, however, can match the offer and sign the player for whatever deal the offering team proposed. If they refuse to sign them, the offering team gets the player but gives the original team the draft pick of the tender placed on the player. An original-round tender performs exactly like it sounds, in which the offering team would give the original team a pick from the round the player was previously taken in.

Here’s an example:

Taysom Hill was given a first-round tender in 2020. This costs $4.67 million in 2020. The Chargers want Hill, so they offer him a three-year/$45 million deal. The Saints can either sign Hill for three year/$45 million or let him go. They decide to let him go. The Chargers then pay the Saints their first-round pick and sign Hill for 3 year/$45 million.

In applying the knowledge of the previous two parts of this series, we can see many team building trends emerge. Guaranteed money, proportional contracts, and other pervasive concepts with regards to contracts and team-building are the cornerstones when it comes to how teams approach their cap room. In understanding these concepts and ideas, a better understanding of the “why” of what teams do can be achieved. Equipped with this understanding, even fans can make informed decisions about why NFL teams do what they do.

For more on The Art of NFL Contracts, click here for Part 1 and click here for Part 2.