Extensions have all but disappeared for veteran players in the NBA, the result of changes to the league's collective bargaining agreement that made it more lucrative for players to finish out their contracts and hit free agency even if they planned to re-sign with their original team.
That has changed recently, however, because the rapidly rising cap has allowed teams with unused cap space to simultaneously renegotiate the contracts of players and extend them, giving players more money now and teams better terms or more security down the road.
Of the handful of players who have renegotiated and extended their contracts, Harden has by far the highest profile. So let's take a look at why it made sense for both Harden and Houston.
Why Harden signed an extension
From Harden's perspective, there was huge financial incentive to extend his contract in exchange for the carrot of renegotiating his salary to the maximum possible this year and next.
Though Harden signed a "max" extension at the conclusion of his rookie contract, the subsequent jump in the salary cap means he was set to make far less than the current maximum salary over those two seasons. By renegotiating him up to the new max, the Rockets gave Harden an additional $9.8 million this season and $10.7 million in 2017-18.
Harden sacrificed almost nothing in future earnings, based on current projections. (This is unlike the situation for Russell Westbrook if Westbrook were to make a similar deal -- the Thunder guard would likely be sacrificing significant future earnings.)
Harden's new 2018-19 salary ($30.5 million) is almost exactly his projected maximum as a free agent in the summer of 2018 ($30.3 million). So it appears that all Harden is really giving up is the ability to become a free agent a year earlier.
There are scenarios where Harden could cost himself future salary down the road by locking in now. The maximum salary could increase, or even go away altogether (a long shot), during the negotiations on the next NBA collective bargaining agreement. Still, if Harden is happy in Houston, that small risk appears well worth the extra money over the next two years.
Why the Rockets signed an extension
From Houston's standpoint, there's a lot more downside here. After all, the Rockets could have simply done nothing and had one of the league's best bargains. I estimate Harden's production to be worth an incredible $145 million over the next two seasons, when he was set to make a little less than $35 million.
Unlike when the Denver Nuggets renegotiated and extended the contracts of Wilson Chandler and Danilo Gallinari last season, Houston didn't trade spending more money now for below-market salaries down the road. As noted, Harden would probably have made about the same amount in 2018-19 either way.
Of course, what the Rockets get out of this deal is the certainty that they'll be the ones paying Harden in 2018-19 -- or if not, a team to which they trade Harden -- which was not a foregone conclusion. If Houston struggled again next season, we would have been looking at many months of rumors about whether he was headed elsewhere in free agency.
The Rockets also lock in the cost certainty of knowing Harden's 2018-19 salary can't change subject to the new CBA, which will help their long-term planning.
All that security came at the cost of their remaining $9.8 million in cap space this summer and $10.7 million next summer. That's why I'm not sure Houston would have made the deal if not for locking up Ryan Anderson and Eric Gordon to four-year contracts this summer, deals that exhausted much of their cap flexibility.
At this point, the Rockets were unlikely to add much in free agency. They filled their biggest remaining need, experienced depth at center, by agreeing to sign Nenê to a two-year, $6 million contract using their room exception after completing this extension.
And Houston's 2017 cap space was getting tight, too. While the Rockets still probably could have gotten to max room by declining the team option on backup forward K.J. McDaniels, that would have required adding no additional 2017-18 salary between now and then. With Harden under contract, Houston can feel comfortable taking on longer contracts in trade.
Ultimately, having Harden under contract is probably worth sacrificing cap flexibility. If the Rockets play well next season, they're going to want to keep their core together, and if they put together another season like 2015-16 they're not going to be able to attract premier free agents no matter how much cap room they have.
For better or worse, Harden is Houston's best selling point. And with this extension, that should remain the case through at least 2018-19.