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.


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. 

  1. General Provisions

    General provisions are balance sheet items representing funds ...
  2. Contract Unit

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

    An agreement to buy or sell the underlying commodity or asset ...
  4. Overhead Rate

    Overhead rate is a cost added on to the direct costs of production ...
  5. Forward Delivery

    Forward delivery is the final stage in a forward contract when ...
  6. United States Natural Gas Fund ...

    The United States Natural Gas Fund (UNG) is an exchange-traded ...
Related Articles
  1. Trading

    Stock Futures vs. Stock Options

    A quick overview of how stock futures and stock options work and why you would pick one over the other depending on the strategy being used.
  2. Investing

    10 Major Companies Tied to the Apple Supply Chain (AAPL)

    Apple has one of the best supply-chain models. Here are some of the top businesses involved, and the benefits and challenges for all.
  3. Investing

    Do Natural Gas Prices Always Follow Oil Trends?

    Prices for oil and natural gas are highly correlated. But investors should be aware of different factors affecting the prices of these commodities.
  4. Investing

    Do Oil and Natural Gas Prices Rise And Fall Together?

    Do the prices of crude oil and natural gas affect each other? Investopedia explores price patterns and provides analysis.
  5. Investing

    Apple’s Suppliers Behaved Better in 2016

    Apple’s 2016 supplier audit revealed better working conditions, environmental practices and care over sourcing conflict materials.
  6. Investing

    Apple Warns Suppliers of 20% iPhone Component Drop

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

    How Long Can Gas Stay Cheap?

    The current gas prices means a lot for the economy and our pockets. Let's explore how long we can expect gas prices to be low, what affects gas prices, and what changes might be in store.
  8. Investing

    5 Reasons Why Private Equity Investors Like Oil and Gas Companies

    Oil and gas companies may look like a risky industry on the outside, but private equity investors have found reasons to regularly invest in these firms.
  1. How are futures used to hedge a position?

    Futures contracts are one of the most common derivatives used to hedge risk. Learn how futures contracts can be used to limit ... Read Answer >>
Trading Center