Reprint: Why calculating Total Contract Value, APY and Total Guarantee for an NFL contract can be really hard

This is a re-print of an article i published around this time last year. It's a bit 'technical' and didn't generate much interest then. It's no more interesting now than it was in 2017, but if anyone wants to understand salary cap more fully, it attempts to explain some reasons why reported contact numbers can be hard to track and understand.

It’s free-agency season, and — especially for Redskins fans dealing with the drama of the Kirk Cousins contract situation — time for fans to be inundated with articles about NFL contracts.

I thought it’d be worth looking at how three of the metrics get calculated, and just how hard it can be for a fan (or a journalist, for that matter) to unravel the details of a contract. I think that this article will help readers understand the value that websites like Sportrac and OverTheCap bring to us; without them, we’d likely all be a lot less well-informed about the salary situation of our favorite franchise.

I’m gonna treat this like a Rich Tandler mailbag article. Hopefully, though, my answer will be a bit more informative than Rich usually is.

Here’s the mailbag question:

How exactly are total contract value, APY and total guaranteed calculated? The answer would seem to be obvious or even intuitive, but I've looked at some of the big contracts in OTC and Spotrac and the numbers just don't add up for me for some reason. Perhaps you could give me a few examples of equations on these things in a couple of real contracts.

Well, I don’t know if I’m ready to give a couple of real contracts, but how about we take a look at just one: Desean Jackson’s contract with the Redskins from 2014-2016.

Let’s start by looking at the OverTheCap OTC breakdown of his contract:

If you take out your calculator and start adding, you get:

base salary: $8.5m

sign bonus: $3.75m

Roster bonus: $9.0m

Workout: $1.5m

Total Contract Value: $22.75m

But the contract was widely reported to be 3 years, $24m!!

Why is there a $1.25m difference?

In this case, the cause is a "dummy" 4th year on the contract that automatically voids. This is a tool used by teams to lower cap hits from signing bonus by writing a voidable year into the contract. The final contract year (in Jackson’s case, year 4), is never going to happen, but it carries 1 year of pro-rated signing bonus until the contract voids. At that point, the signing bonus that has always been charged to Year 4 on paper is brought forward and charged to Year 3.

For cap purposes, the 4th year lowers the cap hit in years 1 & 2 by spreading the $5m signing bonus over 4 years instead of 3, resulting in lower cap hits in the first two years of Jackson’s contract.

When the contract voids, the $1.25m in bonus money gets charged to the team, but it doesn't show up in the OTC chart, because OTC is only reporting the 3 "real" years. That’s why the numbers don’t add up, and seem to be out of balance by $1.25m.

So, the formula for total value is:

Total signing bonus + Base salary for every year + "other" bonuses (roster, workout, injury, etc) = Total Contract Value

A reader may have trouble reconciling numbers because the source (OTC or Sportrac) may not display all the information in their charts. Jackson's deal SHOULD be easy to figure out, because it was a totally new deal and not an extension, but the voided year makes it tricky.

Here are the OTC notes on DJax:

DeSean Jackson signed a three year, $24 million contract with the Washington Redskins on April 2, 2014. Jackson received a $5 million signing bonus and his 2014 and 2015 base salaries and workout bonuses are guaranteed. In addition, Jackson can earn up to $1.5 million in 2014 and $3.75 million in roster bonuses in 2015 that are paid out as long as he is on any of the roster lists besides suspended or non-football injury. These bonuses are also protected bringing the full guarantee to $16 million. In 2016 he can earn up to $3.75 million in roster bonuses which are not guaranteed. The 2017 season is a “dummy year” that is strictly in place to reduce the salary cap charges in the contract. That season automatically voids following the Super Bowl that year. Base salaries of the contract are $1,000,000(2014), $3,750,000(2015), and $3,750,000(2016).

In the case of DJax, OTC accurately reports the deal as $24m total value, and is careful to detail the 2017 "dummy year" in their explanatory notes, however, you can't reconcile the $1.25m variance unless you are intuitive enough (or well-informed enough) to figure out where it's hidden.

As a Redskins fan, I know this detail without reading it, but for contracts you might be less familiar with, they might contain sand traps that are hard to play through.

Let’s look at the Average Per Year metric

APY = TOTAL VALUE / #years

Again, this sounds simple, but looking at DJax, the fairly straightforward calculation of:

$24m / 3 = $8m APY

isn't really that straightforward.

The contract has a 4th year in it (the dummy year) and if you try to get total value by adding up the numbers in the chart, you only get $22.75m. It wouldn't be hard to do something like:

$22.75 / 4 years = $5.68m APY

(but it would be wrong).

When all the numbers add up easily, the APY is a simple calculation; but, as we’ve seen, sometimes the Total Value number can be hard to arrive at without help or specific knowledge of the contract. Heck, even deciding whether to count the contract as a 3-year or 4-year deal may require a few moments’ reflection.

Total guaranteed money

Total guaranteed money is generally reported in aggregate, but we've seen from Andrew Luck's contract that -- if you aren't Mike Florio, with the contract in front of you -- it can be hard to work out from simple media reports.

Let's look at DJax:

The notes from OverTheCap say that DJax has fully guaranteed money of $16m, which his notes give us as:

signing bonus: $5m

'14 & '15 base salaries: $4.75m

'14 & '15 workout bonuses: 1.0m

"protected" roster bonuses in '14 & '15 (1.5 + 3.75): $5.25m

Total guaranteed: $16m

Let's see if we can reconcile to the same number by using the chart:

Column 1: Base salary

2014 = 2.5 (base salary + "protected" roster bonus)

2015 = 7.5 (base salary + "protected" roster bonus)

Total Column 1: $10m

The problems start here:

a. Without the notes, we don't know what components make up the guarantee

b. Without the notes, we don't know that Jackson has 2 years of workout bonuses guaranteed

c. Without the notes, we don't know that there is a dummy 4th year and that the signing bonus is $5m, rather than the $3.75m shown in the chart.

Basically, the only way we can identify the total guarantee is from (a) media reports; or (b) reading detail notes that accompany the charts on sites like OTC.

If I had relied on the chart numbers alone, I could never have calculated the $16m total guarantee, because the chart does not include all the information I need.

I have to read the notes.

And this is why websites like Sportrac and OverTheCap (and, at times, jounalists like Mike Florio or others) can be so damned useful. They provide the easy-to-digest numbers like Total Contract Value and APY, but also provide the detailed explanations needed to understand the structure of the contract, and to see why sometimes — like the DeSean Jackson example given above — the numbers simply don’t seem to add up.

Anyway, that does it for this edition of the mailbag. I hope that helped answer your question. The next ten days or so will be critical for NFL free agency, and I realize fans want to be as knowledgeable as they can.

NFL contracts are complex documents designed to accommodate arcane rules, and often contain ‘hidden’ details that make them difficult to unravel. To paraphrase a saying many people are familiar with, an NFL contract can be like a riddle, wrapped in a mystery, inside an enigma.