A procurement process is incomplete without purchase orders (POs). They are crucial for the success of any business. A purchase order is a legal document created by a buyer and sent to the seller for purchase of goods or services. A PO is a document which is created by the buyer with an intention to purchase products or services from a seller.
Once the PO is accepted by the seller, it becomes a legally binding contract that protects both the buyer and the seller. Since it is a legally binding document, a purchase order contains many fields namely – PO Number, quantity and type of items required, payment terms, delivery details, etc.
The terms and conditions of a PO highlight the rights and obligations of the supplier and the buyer. All this together makes up the entire agreement of the purchase order. But first, we need to understand the purpose of an order and what goes into that order.
Purpose of a Purchase Order
Digital procurement is the norm today and purchase order is an integral part of any good purchasing software. POs are crucial to your business as they document the purchasing part of your inventory management system. Plus, they are a legally binding document.
An order is a significant source of information. If you need to trace the path of a particular product i.e. right from the purchase of raw materials to the sale to the customer – the PO has it all. It is of paramount importance when it comes to transparency in your organization’s procure-to-pay (P2P) process.
The procurement department or the purchasing manager in your organization issues a purchase order form or a PO letter to the supplier to authorize a purchase. An estimated cost of the goods to be purchased is documented in a quote which often precedes a purchase order. You can simply approve that quote using a PO.
The PO is a legal document once accepted by the supplier. This acceptance can be in the form of a written acknowledgement or by fulfilling the order as per the order requirements. POs help both the buyer and the supplier document the transaction necessary in the event of a dispute. In times of a dispute, referencing the purchase order becomes important in these circumstances. This provides that added bit of protection for both buyers and suppliers.
What should be included in a purchase order?
A typical purchase order will highlight what the buyer wants to purchase, how many units they would like to receive and more often than not, has the terms and conditions of the transaction mentioned.
A purchase order is crucial to a business and hence, businesses tend to follow a standard PO form that has the following information where applicable:
- Purchase Order (PO) Number that is often aligned with the invoice number to match the two documents for tax reasons.
- PO date
- Supplier details
- Details of the buyer
- A shipping address
- Description of the products or services you want to buy. This also includes price per unit.
- Discount, if any.
- Details about the delivery fee
- Total amount excluding GST
- Net amount
- Payment information
- Terms and conditions
Now that we know what details go into a purchase order, let’s have a quick understanding of PO terms and conditions.
Purchase Order Terms and Conditions
When you think about reading the terms and conditions on any documents, you usually skip through it or scroll past it. But these terms and conditions protect the rights of everyone involved. Simply put, purchase order terms and conditions legally protect your organization from under-fulfillment of orders.
The PO terms and conditions for your organization may not be the same as that of your competitors. They are there to ensure that your vendors comply with any laws and regulations that affect your industry. However, if you maintain good relationships with your suppliers, you might not have to rely so much on the terms and conditions. But, they are always there as a fallback.
PO terms and conditions may include the following:
- General subject matter and its description
- Buyer rights, obligations and incentives (if any)
- Supplier rights, obligations and incentives (if any)
- Details about business days
- Insurance details against the purchase
- Dispute resolution mechanism
- Confidentiality agreements
- Information on warranties
- Termination or Cancellation period for the purchase order
- Detailed expectation on pricing and delivery
- Laws to be complied with (applicable federal and local laws included)
- Responsibility for attorney’s fees or other fees if an attorney gets involved
- Working requirements with independent contractors and subcontractors
- Requirements regarding workers’ compensation, etc.
These terms and conditions are extremely important in a new business relationship as trust has not been established yet. They protect your organization’s interests and ensure legal protection in the event of under-fulfillment of orders.
While terms and conditions will protect your purchase legally, it always helps to have a good and long-lasting relationship with your suppliers. When the relationship with your suppliers is strong, even if there is a dispute, you should be able to resolve it without relying on legal documents. This way, as mentioned earlier, the terms and conditions can only be used as a fallback to friendly communication.
PO terms and conditions should include every single detail about the POs expectations, obligations, penalties, and incentives. The more clear terms and conditions are, the less likely they are to be misunderstood. Purchase order terms and conditions vary depending on the needs of your businesses. They are detailed and exhaustive and can be more than what we have provided in the above list.
Importance of PO Terms and Conditions
PO terms and conditions protect your company in the following ways:
- Clear legal framework
Purchase order terms and conditions are usually drawn up and reviewed by lawyers to abide by a consistent framework for every transaction your business conducts. Because of this, every transaction your business does is protected under the same legal framework that protects your interests in all possible scenarios.
- Low possibility of litigation
With PO terms and conditions set in advance, the expectations and obligations of both parties are clear. The more details and specifications the PO terms and conditions have, the less appealing it will be for either parties to claim ignorance. Hence, chances of them claiming a violation and taking the matter to court reduce drastically.
- Enforces compliance and limits liability
Since the terms and conditions contain every last detail in writing, it reduces your risk by ensuring your supplier is legally responsible for compliance.
Once your company’s purchase order terms and conditions have been finalized and formalized, they can be automatically included for every purchase order from your digital P2P software. This way, every PO you send out to the supplier has the same terms and conditions that protect the same information and parties.
What matters while drafting the PO terms and conditions is to aim for maximum detail and specifications when laying out expectations, obligations, penalties, incentives, etc. Seeking independent legal advice is crucial while drafting the PO terms and conditions.