Salary Cap Explained

The salary cap is a limit on the dollar amount teams can spend on player contracts, which helps to maintain competitive balance in the league. The basic idea behind a salary cap is that a team can only sign a free agent if its total payroll will not exceed the cap -- there are exceptions to this that will be covered elsewhere.

A team's cap room refers to its ability to sign players to free agent contracts. If a team is above the cap, then its room is limited to the exceptions it possesses. If the team is below the cap, then its room is how far it is below the cap when all salaries and cap holds are included.

Cap holds are "placeholders" for players the team is expected to sign in the future. For example, a team is expected to sign its unsigned first round draft pick, so an amount is reserved for this signing in the form of a cap hold. A team $10 million below the cap with $4 million in cap holds therefore has $6 million in room. A team $5 million under the cap with $6 million in cap holds is not considered to be under the cap at all, and must use exceptions to sign players.

How Is the Salary Cap Calculated?

The following are included in team salary:

1) Salaries of all active and inactive players on the roster
2) Salaries still owed to waived or bought-out players, minus any set-off amounts and subject to the Stretch provision
3) Any salary still being paid to retired players
4) A cap hold for a percentage of the previous salary of every un-renounced free agent
5) A cap hold for salaries offered in offer sheets to restricted free agents
6) A cap hold called an "incomplete roster charge"^a if the team has fewer than 12 players (players under contract, free agents included in team salary, players given offer sheets, and first round draft picks)
7) A cap hold for the combined amount of any Mid-Level, Bi-Annual, Disabled Player and trade exceptions available to the team, if the team is under the salary cap^b
8) Salaries for completed contracts (such as 10-day contracts) are included in team salaries for the remainder of that season

Notes:
a - This charge is equal to the rookie minimum salary for each player fewer than 12. For example, if there are 11 players included in team salary, then an amount equal to the rookie minimum salary is added to the team salary; if the roster is completely empty, then 12 times the rookie minimum salary is added to the team salary. This charge only applies during the offseason.
b - Teams may renounce these exceptions, in which case they no longer are included in team salary.

Over the Cap vs. Under the Cap

By default, all teams are assumed to operate as teams over the salary cap for the season. This gives you license to use things designed for over the cap teams, such as trade exceptions, salary cap exceptions, etc. If you have cap space and wish to operate as an under the cap team, you can change your status by using that cap space via trade, free agency, waiver claim, etc. However, once you use that cap space, you cannot then go back to operating as an over the cap team once your cap space is gone; you will be considered as a team under the cap for the duration of that season, and things such as trade exceptions, salary cap exceptions (other than the Room exception that is meant for teams that have used cap room), etc. will not be available to you.