What is a purchase order?

Business plan

A Purchase Order (PO) is a document put together by a buyer (usually a company) and sent to a supplier. The PO sets out what the company is buying, how much they are willing to pay for it, and how and when the work must be done.

You can see a Purchase Order and an Invoice as two sides of the same coin. The PO is the request to do the work, and the invoice is the request for payment after the work has been completed. The final invoice should fully reflect the work outlined in the PO, including price, delivery date, shipping costs etc.

So why do we need a PO?

1) Keeping control of the job
A good Purchase Order keeps control of the work firmly in the hands of the buyer, and also helps the supplier be certain of the work required and the costs involved. By listing exactly the work required, the buyer knows that there will not be any ‘scope creep’ with extra work being tagged on by the supplier, and the final costs rising. If the supplier does want to change the nature of the work then they must contact the buyer and request an agreed updated PO from the buyer.

2) It protects the company if things go wrong
Everyone has problems with suppliers, even the best ones. If your company has a strong PO culture then if a problem arises with a job you have a strong legal trail to prove what you asked for, and what you did not.

3) Internal best practice
If your company Finance department is serious about keeping costs and suppliers under control, and from stopping employees spending money without planning the work properly, then the PO system really helps.

Repeat and call-off purchase orders

For regular recurring work then why not set up a standing or repeat PO? This will allow you to request the same work over again from a supplier, without repeating the paperwork every time. For example, if you have a monthly job from a printer, then issue a 12 month PO to deliver the work 12 times at an agreed cost and specification.

You can also have call-off PO’s too for ad-hoc work. This will allow you to set the terms of the arrangement with the supplier in advance, so you can move quickly when the work is needed.

Legal value of a PO

A Purchase Order only becomes a legally binding contract once the supplier formally accepts the terms of the PO, and communicates this in writing to the buyer/issuer of the PO.

Most buyers who issue PO’s will also include the company’s Term and Conditions as an appendix to the Purchase Order and request agreement to these T&Cs as part of the acceptance of the PO. Suppliers may too have specific T&Cs that need to be met for work to commence. If this is the case then both companies legal or finance team should negotiate an acceptable position for both parties before proceeding.

The PO protects both parties in the arrangement. If the buyer refuses or fails to pay the supplier then the supplier is protected too by the binding contract of the agreed Purchase Order.

LEAVE A REPLY

Please enter your comment!
Please enter your name here