The world of purchase orders and contracts can be a bit confusing sometimes. We’ve put together a short article outlining the similarities and differences between the two to help you sort them out.
Purchase Order and Contracts Basics
Let’s start by talking about each of these documents. A purchase order is a document from a buyer to a seller that orders a product. It should include everything the seller would need to know including quantity, price, a description and a delivery date.
When a purchase order is accepted by the seller, it does become a legal contract. The seller is acknowledging they will sell the items on the purchase order for the prices listed, and abide by the terms and conditions.
Note that the seller does not have to accept the purchase order. It isn’t considered a legal contract until it’s accepted by the seller.
A contract is a document that outlines descriptions and costs of goods. It also contains terms and conditions.
This gets confusing, because it means a purchase order can be a contract. However, that doesn’t mean all contracts are purchase orders. One way that might help is to think about the timeframe.
Short Term vs. Long Term
A purchase order usually refers to something that has a short duration. The terms may be to deliver in a couple of hours or in 2 years. Either way, the duration is relatively short compared to how long some contracts can go.
A contract can often be a long term document. For example, it may specify that the buyer will purchase items from a seller for up to 3 years, without going to the market for competitive bids. Or it might outline how the buyer and seller manage freight and transportation of the goods.
Another way to think about it is guidance. A contract gives guidance to how purchase orders should be executed.
Terms and Conditions in Legal Contracts
Another example to explain the differences between purchase orders and contracts can be seen in the terms and conditions.
A purchase order will usually have some kind of terms. For example, there will be a delivery date, address, and payment terms – such as Net 30 (meaning the buyer needs to pay for the goods within 30 days.)
A contract will usually be more specific, thus making them useful for complex transactions and relationships. For example, it makes sense to have a contract when a company is offering marketing services to another one. It might break down the expected results, how the marketing agency will be paid, how long the two parties will work together, reporting methods and more.
For physical goods, a contract might be used to specify certain aspects of the product such as size, weight, performance, cost or lead time. This makes sense if the buyer is paying the seller to develop a new product.
Is a purchase order a contract? Once it becomes accepted by the seller, yes. However, the world of contracts and POs is a convoluted one, so if you have questions call us at 714.456.9118 or send us an email at firstname.lastname@example.org. We look forward to hearing from you.
Courtesy of Cuselleration