Purchase Order

You have used an RFI to collect information, issued the RFQ, received and evaluated bids, and now want a legally binding document for the service or product. Likewise, the vendor wants proof that they will be paid for the product or service.

This is where a crucial procurement document, a Purchase Order (PO), comes into the picture. 

Today’s blog post will discuss this in detail. 

What is a Purchase Order (PO)?

A purchase order is a legally binding document used to consummate a procurement contract. Issuing it is a significant milestone in the procurement process. 

After contractors submit responses to the RFQ, the seller evaluates them technically and commercially before selecting the most competitive bid. An RFQ is converted to a PO with added terms and conditions, pricing, and delivery details. 

A purchase order is a contract. The vendor must supply or deliver specific services as stated, and the buyer must pay the agreed amount. 

The PO is a control measure for both the buyer and the seller. It ensures all specifications are agreed upon and that authorized representatives have signed off. 

Organizations use a PO to buy commodities, goods, spares, repairs, or other simple services.  

Guidelines for Creating a Purchase Order

  • Get the vendor’s acceptance with their signature. Keep a copy with you and provide another to the vendor.
  • Communicate with the supplier as the delivery deadline approaches.
  • Keep a record of the delivery date and update as deliveries arrive.
  • Review outstanding orders periodically. 

Types of Purchase Orders

  • Local Purchase Order
  • Foreign Purchase Order
  • Service Order
  • Blanket Purchase Order

Local Purchase Order (LPO)

An LPO is used with local vendors. This purchase order is valid for all transactions within a country. Most often it is used for supplying goods and is paid for in local currency. For instance, in the USA, an LPO is in the USD, and in Kuwait, it is in the Kuwaiti Dinar.

Foreign Purchase Order (FPO)

A foreign purchase order is also called an International Purchase Order. This is used for transactions outside of the buyer’s country. It is like LPO, the only difference being in currencies; it can be in USDs, Pound, or Euros, for example.

Service Order

This is a specific purchase order for works or services. It is also called a work order.

Blanket Purchase Order

In a blanket purchase order, the buyer places an order for the same material to be delivered repeatedly over a fixed duration to get a discounted price. For example, they can fix the price of certain hardware items, and the seller must provide them when required and for the same price.

The PO can contain the minimum order quality to provide a cushion and guarantee profit.

Format of a Purchase Order Form

A purchase order can have the following details:

Issue Date: This is the PO’s signing date. It is essential because it determines the delivery date.

Delivery Date: The seller has to deliver goods or services by this date. Time and quality are the core of a purchase order; the vendor must work to deliver on or before the stated date.

If the supplier delays the delivery, they may be subjected to a penalty or deduction.

Validity: The purchase order is valid from the signing date.

Purchase Order Number: This is a unique number generated for the PO. Usually, an RFQ is converted to PO, so an RFQ number precedes a PO.

Signatory: A purchase order is not valid unless it is signed by a representative of the buyers and seller.

Product or Service Description: This is where the seller provides the details of the goods or services to be delivered. 

Terms and Conditions: T&C is the key component of the PO where boundaries, penalties, limitations are determined.

Vendor Information: This shows details such as the vendor’s name, address, and number.

Delivery Information: This gives the address for delivery of the goods/service.

Acknowledgment Slip: This is the page where the vendor’s representative must sign, giving evidence of offer acceptance.

Purchase Order Template

purchase order template

Before raising the PO, ensure you have all approvals and the budget. After signing, make sure the seller receives a copy and that you get acknowledgment of it.

Uses of a Purchase Order

  1. It is a contract that protects buyers and sellers.
  2. It allows the seller to express their expectations clearly.
  3. The contractor can tender it to financial institutions or dealers to obtain loans or credits.
  4. It enhances document tracking, receipt of products, and payment.
  5. It shows the vendor where to deliver materials and how to obtain payment.

Features of Purchase Order

A purchase order is a contract, and it has the following features:

  1. There cannot be any amendments to the PO without both parties’ agreement.
  2. If it is an open competitive contract from a government entity, no terms and conditions can be changed once the bid is opened. If change is required, the government entity must cancel the old tender and issue a new one to give a fair chance to other vendors.
  3. The PO’s price covers all expected expenditures, including insurance, tax, logistics, and everything else. A contractor should consider this carefully before signing.
  4. No invoice shall be processed for goods not included in the PO.
  5. Confidentiality of the contract must be maintained; no information can be disclosed except that required by legal or regulatory sources.

The PO can include a force majeure clause that says neither party shall be liable for any delay or non-performance due to civil disturbances, acts of God, or embargoes. However, the contractor shall notify the seller within a specified number of days of the force majeure event.

Purchase Order Vs Invoice

A purchase order is a legally binding agreement between a buyer and seller that the latter will deliver the product and the former will pay for it.

The invoice is a document sent by the seller to collect payment. They create the invoice once the item is delivered and accepted by the buyer.

Purchase orders and invoices can contain similar details except for the technical specifications. The invoices will have a separate invoice number and the PO number for their tracking.

Usually, an invoice is accompanied by a material acceptance report.

Purchase order Pros & Cons

Pros

  • Streamlined purchasing experience
  • On-time delivery
  • High quality and best price 
  • Better budgeting forecasting

Cons

  • Time-consuming process
  • Extra paperwork

Summary

The purchase order is a legal document that promotes a smooth business relationship between the buyer and seller. It is a control that protects both parties and ensures the delivery of goods and services and payment for vendors.

Are you involved with creating purchase orders in your organization? If yes, please share your experience through the comments section.

References

  1. https://www.nou.edu.ng/sites/default/files/2017-03/ENT%20324.pdf
  2. https://www.icc-cpi.int/nr/rdonlyres/47013f54-b8d0-4fab-b5a2-245126860a88/281225/procurement_sop_eng.pdf
  3. https://wise.com/us/blog/purchase-order-definition
  4. https://www.investsmall.co/local-purchase-order/