Sunday, January 6, 2013

Purchase order versus Purchase Agreement - What's the difference?



In a linked in forum someone asked the difference between purchase agreements ans purchase orders. Many of the responses that I saw were all over the map, so I decided to do a post to explain the differences.

The first thing to understand is there are many types of purchase agreements and there are also many different uses for purchase orders. Some purchase agreements make firm commitments to purchase a specific item or quantity. You can have master agreements where over time you add additional product or service you can purchase over time. You can have agreements that establish standard terms that apply to all purchases, with the expectation that specific purchases will be made using statements of work that incorporate by reference the terms master agreement. Those statements of work become purchase agreements on their own. A basic ordering purchase agreement establishes all the Terms & Conditions that apply when future purchases are made under that agreement. That type of agreement does not commit to purchase of a firm quantity and the actual purchase is made using a purchase order. There can be purchase agreements that make firm commitment to purchase a specific quantity, where a purchase order may be used to schedule specific deliveries. There can be purchase agreements in which a buyer commits to purchase all or a percentage of its requirements from a supplier (a requirements contract) where purchase orders may be used to schedule deliveries against that commitment.

There are also a many types of purchase order and uses for purchase orders. A purchase order may be a stand -alone document that makes a specific purchase. A blanket purchase order may make a commitment to purchase a quantity over an extended period of time with the price and terms fixed, and individual “calls” against that may use a purchase order to schedule deliveries against that blanket purchase order. You can have purchase agreements that contemplate inventory stocking under a pull-replenishment type of system where the agreement establishes the pull signal as a form of purchase order that triggers the obligation to make payment.

The traditional purchase order is normally used for a purchase from a supplier where there is none of these other various forms of purchase agreements in place. Purchase Order can be used in a number of ways when there is a purchase agreement in place.

So what is the difference between the two documents?

The main difference is when there is enforceability of its terms. A purchase order is an offer that does not become a binding contract until it is accepted as issued or is accepted by performance. An acceptance with different terms creates a counter-offer that must be accepted by the Buyer. If there is no acceptance and there is a shipment what occurs is what's called the battle of the forms to determine what the terms are for that purchase.

With a Purchase Agreement, normally what you find is language that says that as long as the purchase order issued complies with the terms of the Purchase Agreement it is issued under, that order is binding and enforceable.

The difference between the two has nothing to do with the time period involved. A Blanket Purchase Order may be for long period and a purchase agreement may be for a very short period.

The difference has nothing to do with the volume involved. You could have a single purchase under an agreement and a volume of purchases under a master purchase order.

The difference has nothing to do with the firmness of the commitment. Depending upon the type of purchase agreement you use, it can either be a firm commitment to purchase or an agreement as to terms that will apply for future P.O. purchases. A Purchase Order is an offer, which may be withdrawn prior to acceptance so it is not a firm commitment, It only become firm once accepted.

Agreements can stand on their own, without use of P.O.'s. or you may use P.O.’s for some actions under the purchase agreement. P.O.'s can be used with Purchase Agreements or they can be stand alone.

Another difference is a purchase agreement should be signed before transactions or work commences. A purchase order is an offer to conduct business and does not bind the Supplier until such time as it is accepted. Acceptance may be signing an acknowledgement copy or providing an electronic acceptance that does not include additional or differing terms. It may be accept it by commencing performance. A purchase agreement requires signing by both parties, a Purchase Order requires a signing by the Buyer and only a form of acceptance by the supplier to be binding. Once a purchase order is accepted the two are no different, they are both enforceable contracts.

Another difference between the two and which document is best to use will be driven by the circumstances of the purchase. The higher the potential risk, the more frequently a purchase agreement will be used to manage those risks. When a stand alone purchase order is used they are normally used for lower risk purchases where a lesser set of terms are required. When purchase orders are used under a purchase agreement the majority of the risks may be managed by the purchase agreement. If there are risks to be managed, the purchase order would need to include additional or different terms.

When you are dealing with higher risk issues, and you are using a purchase order only you want to make sure that the Supplier signs the acknowledgement of that purchase order to establish that as a firm commitment. If you are dealing with higher risk issues and are issuing a purchase order under an agreement that doesn’t adequately
address those risks, you want to make sure that the Supplier signs the acknowledgement of that purchase order. You also need to manage the precedence between the Purchase Order terms and the Purchase Agreement terms. For example, If the P.O. terms are additional, or different from the Purchase Agreement terms you need to include a clear statement in the Purchase Order that the specific different or additional terms listed on the purchase order shall have precedence over the terms of the purchase agreement only for that purchase and have that signed by the parties.

1 comment:

  1. Thanks Jack for this blog. I think it address all the related things and aspects about Purchase Order and Purchase Agreement. Thanks again for this effort and valuable information.

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