Texans Evolving on Contract Structure

Prior to the start of the 2011 NFL season, the NFL owners and players agreed to a new collective bargaining agreement. This agreement ushered in new salary cap accounting functions based on the NFL player contract. Functions like evenly pro-rating signing bonuses, up to 5 years, over the life of the player contract; and one time or per game roster bonuses are now incorporated into the contracts today. The Houston Texans have entered their sixth offseason since the new CBA was established.

Rick Smith & Chris Olsen oversee player contracts and management of the team salary cap. During this span of the new CBA the Texans have made a fundamental change in their contract structure to limit their salary cap liability on the back end of player contracts.

In the beginning the Texans would hand out large signing bonuses with minimal salary guarantees in player contracts. While this provided a large sum of money up front for the player, this created a large amount of “dead money” on the back end of the player contract. Dead money is money already paid to the player, but has not been accounted for to the salary cap. Contracts for Johnathan Joseph, Brian Cushing, and Matt Schaub utilized the large signing bonus structure. By using the large signing bonus and pro-rating the amount over the contract, the Texans were able to use a lower base salary early in the contract to keep the salary cap charge low.

Starting in 2014 the Texans started incorporating one time roster bonuses into their player contracts, using the bonus in the first year to lower the signing bonus amount given. One time roster bonuses are not pro-rated over the contract term, but are calculated in full for the respective season. By lowering the signing bonus amounts, the team is able to lower the amount of “dead money” on the back end of the contract.

Below are structure examples of a 4 year contract worth $26 million including $12 million guaranteed. With a 4 year contract, a team will try to structure it as a 2 year contract making the last 2 years as “pay as you go” years.

Large Signing Bonus Structure

$26 million with a $10 milllion signing bonus, first year salary is guaranteed.

Salary Pro-Rated SB Roster Bonus Cap Charge Dead Money
$2,000,000 $2,500,000 $0 $4,500,000 $12,000,000
$3,500,000 $2,500,000 $0 $6,000,000 $7,500,000
$4,500,000 $2,500,000 $0 $7,000,000 $5,000,000
$6,000,000 $2,500,000 $0 $8,500,000 $2,500,000

As you can see in Year 3 of the contract there is a significant amount of “dead money” remaining and only offering a minimal $2 million salary cap savings. This was the old contract structure used by the Houston Texans. While it offered cash flow up front, there was very little benefit to the team on this structure.

 

Small Signing Bonus w/ Roster Bonus Structure

$26 milllion with a $4 million signing bonus, $2.5 million roster bonus, and first & $3.5 million of second year salary is guaranteed.

Salary Pro-Rated SB Roster Bonus Cap Charge Dead Money
$2,000,000 $1,000,000 $2,500,000 $5,500,000 $12,000,000
$5,000,000 $1,000,000 $0 $6,000,000 $6,500,000
$6,000,000 $1,000,000 $0 $7,000,000 $2,000,000
$6,500,000 $1,000,000 $0 $7,500,000 $1,000,000

This structure provides a lower “dead money” charge in Year 3 & Year 4 of the player contract. With this structure the team could move on from the player after 2 years and achieve more salary cap savings in Year 3 if a move needed to be made. This structure evens out the cash flow, limits liability, yet offers the same amount of guaranteed money to the player.

Both contracts offer similar 2 year cash flow amounts; which is an important detail in a 4 year contract. The new model offers a better (to the player) 3 year cash flow if the player is still on the roster.

Examine the contracts of J.J. Watt, Brock Osweiler, Vince Wilfork, Brian Hoyer, Lamar Miller, Cecil Shorts, and Jeff Allen and you will find a similar structure. The dollar amounts and contract length will differ but the structure essentially is the same between all of them. The Texans have now turned their 4 year contracts into 2 year contracts, and their 2 year contracts into 1 year contracts. This offers the team maximum flexibility on the back end of the contract with limited salary cap liability. Maximum flexibility each season lowers the team’s contract commitments allowing more roster moves to field a better team.

 

Troy

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