Toolbox: Contract Evaluation

This is going to be a very short post, as I’m just presenting a quick and dirty Contract Evaluation spreadsheet. Maybe your favorite player just signed a new contract, and you want to know if it was a good deal or a bad deal. Or maybe a rival team just signed one of their guys, and you want to prove it was a completely moronic deal (looking at you, Phillies). Whatever it is you want to evaluate a new contract for, this is an easy tool to use when doing just that. I created this spreadsheet at the end of last season, and it worked really well for me in the off-season, as the numbers it spits out are pretty consistent with those cited by guys like Dan Szymborski and Dave Cameron. Keep reading to get the run-down on how it all works.

RUNDOWN OF HOW IT ALL WORKS

Here’s the link: Click this magical text to go to the spreadsheet.

It works using 7 basic inputs- 3 of which are known values and 4 of which are assumptions- to determine a dollar value for how valuable the player should be over his contract years. The known-value inputs are the player’s age, the number of years he has left under team control, and the number of years the contract is for. The assumptions are the current market value of one win, the player’s current true-talent value (in Wins Above Replacement), the current inflation rate of dollars per win per year, the age at which the player should begin to decline, and how drastic the decline should be. I use $6 Million for the cost of a win based on various things I’ve read. I’ve seen estimates as low as $5.5 Million per win and all the way up to $7.5 Milllion per win, so I consider $6 Million to be comfortably conservative. I also use a 5 percent inflation rate, as I believe this to be a pretty standard value that many smarter men agree is appropriate. The aging assumptions I use are also pretty generic, assuming a 0.5 WAR per year decrease in value starting after the age 27 season. Obviously, you’d actually want to use an aging curve, but this is just meant to be a simple, rough estimate so the linear aging assumption is perfectly fine. The way I make my assumption for current true-talent value is by taking a player’s rest of season projection from ZiPS (available at the player’s page on Fangraphs.com), dividing the projected WAR by the projected number of games he’ll play, and multiplying that by 155.

example

Click to embiggen

Let’s quickly walk through how it works, using Mike Trout as an example. Going into his age 22 season, Mike signed a contract for 6 years worth $144.5MM. For the sake of the exercise, I’m going to include the $1MM contract he signed for 2014 to make it a 7 year, $145.5MM contract going from 2014 to 2020. The first input is age, which is obviously 22. The second is cost per win, which I explained above as $6MM. He has 4 years left under team control, and the contract runs for 7 years. The decline age, aging, and inflation assumptions are all set as noted above. ZiPS projects him to be worth 3.2 WAR through 55 games for the rest of the season, so we’ll use 9 WAR as his estimated current value. His first year is a pre-arbitration year, so it automatically gets a dollar value of the league minimum salary (the sheet does this for all players in their pre-arb years). His next three years are arbitration years, so his dollar values for those years are determined by the 40/60/80 arbitration assumption. This assumption says that a player typically receives 40 percent of his market value in his first arbitration year, 60 percent in his second, and 80 percent in his third. The rest of the years are normal free-agency years, so his dollar value is equal to his full market value. Once the calculations are complete, we find that he should be worth $304MM during the life of his contract, almost twice as much as the contract he signed. Obviously, if he gets hurt, this projected value completely goes out the window, which is likely why he agreed to sign for such a relatively small amount of money. But assuming he stays healthy and continues to perform at his current level, this should be an incredible deal for the Angels.

Anyway, here’s the link to the sheet. Have fun with it and let me know if you have any questions.

LINK TO SPREADSHEET FOR THOSE WHO JUST SCROLLED DOWN

https://docs.google.com/spreadsheets/d/1Xd_sXZkz3xjLnkoG0c0galpk0t6ww4yZ4aYU7XOsv2Q/edit?usp=sharing

Spreadsheet

Stephen came up with the idea for this blog shortly after graduating from Tech. Realizing that life is ephemeral, he decided to put (metaphorical) pen to paper and catalogue his thoughts. His thoughts are series of numbers and spreadsheets, casually categorized as “research,” and said research is usually conducted on the margins of what is both relevant and socially acceptable.

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