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CBA 101: Contract Extensions

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Daniel Hackett continues his CBA 101 series with a look at the various rules that apply to contract extensions in the NBA.

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Hey all. Welcome to the fourth in a series of posts where I'll be outlining the basic rules of the NBA Collective Bargaining Agreement.

Again, useful sources for more information on the salary cap include the CBA itself and of course Larry Coon's CBAfaq.com.

In the last post, I talked about trade rules.  In this post, we'll move on to the second of our more specific topics: extensions.

Contract Extensions

First, let's clarify something that the media gets wrong all the time. An extension is not a player re-signing with his team. That's a new contract. There were plenty of reports this summer of Kyle Lowry signing an extension with the Raptors. Not true - he signed a new contract. That might seem like pedantry to some, but in terms of the limitations of what an extension allows a player to sign for versus a new contract, there's all the difference in the world.

A contract extension is when a player re-ups with his team by extending his current contract, obviously, before hitting free agency. What this means is that, for the most part, the contract has to look like it is the same contract, just longer. So, it has to follow the same rules as any contract.

Contract Rules

We're quite a ways in to be getting into this now, but we'd better go over the basic rules of contracts in the NBA at this point.

1) The cap space (or exception) you have to offer a player determines their first year salary. Subsequent years can have the player be paid more or less than the first year salary.

2) Annual raises (or decreases in salary) are limited. For a team with a player's Bird Rights (or Early Bird Rights), that maximum is 7.5 percent of their first year salary. For other teams, it is 4.5 percent. Annual pay can fluctuate however you like (always increasing, always decreasing, up and down, flat pay) so long as the year to year differences are within that 7.5 or 4.5 percent limit.

3) Length of contract is limited. For a team with a player's Bird Rights, the maximum length is five years. For other teams, four years. Some exceptions are even shorter, at two or three years maximum contract lengths.

There are other rules that apply to specific situations, but those are the basic things to know about what can be offered free agents.

Veteran Contract Extensions

Now, back to extensions. A veteran contract extension (any extension with the exception of players coming off their rookie scale deals) can be made to any player currently on a contract that was at least four years in length, if they are in at least the fourth year of their deal. These extensions can be signed right up to the official end of the contract, June 30th of the last year of their deal.

Veteran extensions, like contracts are limited in three ways: first year salary, annual raises, and contract length.

The first year salary of a veteran extension is limited by a raise over their last year salary in their current contract.  The idea of a contract extension is to continue the current contract - as such, the basic 7.5 percent raise allowed players with Bird Rights is used. So in the first year of the extension, players can receive a salary up to 107.5 percent of the final year salary of the current contract. Note that this is a maximum - they are free to agree to as low a starting salary as they please, so long as it is equal to or above the league-wide minimum salary.

The maximum raise is just like a regular contract. 7.5 percent of the first year salary. That's easy.

Contract length is where veteran extensions are poor choices for some players.  Some players want to earn more per year, but with many top players they are already at the maximum.  For those players, contract length is a big issue. And veteran contract extensions are limited to four years, including any years left on the current contract. So, effectively they are limited to adding on three years if they negotiate an extension at the end of their contract. As you can see, this is significantly less term than the four or five year options listed above for free agents.

Kyle Lowry was a great example of both issues, actually. Coming off last year, he made $6.21 million. So the Raptors could offer him a starting salary of $6.7 million, with 7.5 percent raises each year, for only three years. That's $21.5 million over three years. Doesn't really compare to the $48 million over four years he got in free agency, huh?

Rookie Scale Extensions

Extensions for players coming off their rookie scale deals are a little more complex. And as such, I'm going to bump them back to next time.

So there you have it. Those are the basic rules that apply to veteran contract extensions. In the coming installments, we'll get into more detail on rookie scale contract extensions and restricted free agency, topics that will be pretty important for the Raptors and for Jonas Valanciunas and Terrence Ross come next summer.

As we go along with this, I'll try to answer any specific questions related to the post in the comments, but if there are any larger topics you want covered, sound off in the comments as well, and I'll dedicate a future post to covering it in-depth.