What is 'Take or Pay'

Take or pay is a provision, written into a contract, whereby one party has the obligation of either taking delivery of goods or paying a specified amount.

BREAKING DOWN 'Take or Pay'

Take or pay provisions are generally included between companies with their own suppliers which require that the purchasing firm take a stipulated supply of goods from the supplier by a certain date, at the risk of paying a fine to the supplier if they don't do so. This sort of agreement primarily benefits the supplier by reducing their risk of losing money on any capital spent to produce whichever product they are trying to sell. 

Take or Pay in Practice

Take or pay provisions are very common in the energy sector, because of the huge overhead costs for suppliers of supplying energy units like natural gas or crude oil. The overhead costs of providing crude oil as compared to a haircut, for example, are very high. Take or pay contracts provide energy suppliers an incentive to expend capital up front because they have a measure of assurance that they'll be able to sell their products. 

For example, Firm A can pledge to purchase $200 million worth of natural gas from the supplier, Firm B, over a period of 10 years at an agreed rate of $20 million per year. Firm A may find, however, that in a given year they will only need $18 million worth. If they do not purchase the planned $20 million, they will be subjected to a fee, which is agreed to in the original contract. Typically these fees are smaller than purchase price; having forgone $2 million in purchased natural gas, Firm A may be subject to a fee of $1.5 million. 

RELATED TERMS
  1. Provision

    A provision is a stipulation in a contract or legal document ...
  2. Contract Unit

    A Contract Unit is the actual amount of the underlying asset ...
  3. Overhead Rate

    Overhead rate is a cost added on to the direct costs of production ...
  4. Physical Delivery

    Physical delivery is a term in an options or futures contract ...
  5. Oil Price to Natural Gas Ratio

    The oil price to natural gas ratio compares prices of crude oil ...
  6. Trade Credit

    A trade credit is an agreement in which a customer can purchase ...
Related Articles
  1. Investing

    Apple's IPhone 8 Glitz May Not Lift Its Suppliers

    Shares of Apple's suppliers are no sure bet even if the iPhone 8 is a winner
  2. Investing

    A Look Inside The Natural Gas Pipeline

    The United States is the Saudi Arabia of natural gas, but natural gas stocks were a mixed bag last year.
  3. Investing

    The Smartest Strategies For Trading Natural Gas Options

    There are multiple strategies for trading natural gas options, once you have the right data. Here we discuss the basics.
  4. Investing

    Apple Warns Suppliers of 20% iPhone Component Drop

    Apple is reportedly telling suppliers to prepare for a lower number of iPhone units.
  5. Investing

    Natural Gas Industry: An Investment Guide

    Investors looking into this industry are faced with a confusing amount of information. We explain the important concepts and terms.
  6. Investing

    Lowe's Stock: Analyzing 5 Key Customers (LOW, HD)

    Learn information about the five companies that derive the most of their revenues from Lowe’s home renovation and supply stores.
  7. Investing

    8 Investing Fees That You Should Never Pay

    In investment management and financial planning there are a plethora of fees that are unnecessary.
  8. Investing

    Top 4 Natural Gas Stocks as of April 2018

    These four companies that develop natural gas may be strong in 2018.
RELATED FAQS
  1. What is the difference between options and futures?

    An option gives a buyer the right, but not the obligation to buy or sell an asset, A futures contract obligates the buyer ... Read Answer >>
  2. Forward Contracts vs. Futures Contracts

    While both forward and futures contracts allow people to buy or sell a specific asset at a specific time at a given price, ... Read Answer >>
  3. Does gross profit include labor and overhead?

    Gross profit is a company's profit after subtracting the costs of producing the goods and services. Several costs impact ... Read Answer >>
  4. How do government subsidies help an industry?

    Understand how government subsidies can help an industry, on both the consumer and supplier side. Learn the potential drawback ... Read Answer >>
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center