Purchase Orders: A Simple Contract for Buying Goods and Services

A purchase order (PO) is a buyer's written request to a seller for specific goods or services at stated prices. When the seller accepts, it can form a binding contract.

What a PO includes

• PO number, date and parties.
• Description, quantity and unit price.
• Delivery date and address.
• Payment and shipping terms.
• Reference to terms and conditions.
• Authorized signature.

PO versus invoice

The buyer issues a PO before the sale. The seller sends an invoice after, requesting payment. Matching the two helps catch errors and fraud.

Disputes to avoid

• Conflicting terms on the PO and the seller's forms.
• Verbal changes not recorded in writing.
• Missing delivery deadlines.
• Unclear return or warranty terms.

Good practice

1. Number and track every PO.
2. Get written confirmation.
3. Inspect goods on delivery and report problems quickly.
4. Keep POs, invoices and receipts together.

The purchase order process

1. The buyer identifies what is needed and prepares a PO.
2. The PO is sent to the seller.
3. The seller accepts, often by confirming in writing or shipping.
4. The goods or services are delivered.
5. The buyer inspects and approves.
6. The seller issues an invoice, and the buyer pays.

Terms to put on every PO

• Unique PO number and date.
• Seller and buyer legal names and contacts.
• Itemized description, quantity, price and total.
• Delivery date, location and shipping method.
• Payment terms and any discounts.
• Inspection and return rules.
• Reference to standard terms and conditions.

When terms conflict

Buyers and sellers often use their own forms, which may conflict. Courts may apply special rules for sale of goods, including the Uniform Commercial Code, to decide which terms govern. To avoid surprises, state clearly that the PO terms control or attach a signed master agreement.

Control and fraud prevention

• Require approval before a PO is issued.
• Match the PO, delivery receipt and invoice before paying.
• Limit who can place orders.
• Keep records organized and accessible.

Small business tips

1. Use sequential numbers.
2. Keep digital copies.
3. Confirm prices in writing before ordering.
4. Check sales tax and resale certificate rules.
5. Review recurring orders from time to time.

Using POs in a growing business

• Standardize a template with your terms and conditions.
• Use approval levels for larger orders.
• Send POs by email and keep a log.
• Match POs to receiving reports and invoices before paying.
• Review frequent suppliers and negotiate bulk pricing.

Common mistakes

• Verbal orders with no written record.
• Changing quantities or prices without updating the PO.
• Failing to inspect deliveries.
• Missing deadlines to reject non-conforming goods.
• Paying invoices that do not match the PO.

Returns, defects and remedies

State the inspection period and how to return damaged or incorrect goods. Under commercial sales law, a buyer who gives timely notice of defects may have rights to reject, repair or replacement, or damages. Keep photos and packing slips as evidence.

International and special purchases

1. Specify currency, shipping terms and who pays customs.
2. Check export and import rules.
3. For equipment, include installation and warranty terms.
4. Consider insurance for high-value shipments.

Frequently asked questions