Is a Purchase Order a Contract?

Understanding the Legalities of Purchase Orders

Creating a purchase requisition process and subsequently using purchase orders makes sense for almost every small business with more than a handful of employees. It helps you better manage and control costs and creates documentation to reconcile and audit incoming invoices. That brings up the next question: Is a purchase order a contract?

The short answer is yes. The Uniform Commercial Code “provides that a contract for the sale of  goods may be made in any manner sufficient to show agreement, and that an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a  prompt promise to ship or by the prompt or current shipment of conforming or non-conforming   goods.”

The “rubber-meets-the-road” difference between a purchase order and a contract centers on    duration and value. Purchase orders typically represent a single business transaction, and in some instances, both documents may be used. For example, a company may sign a contract for goods or services to be provided over an extended period, perhaps to lock in preferred pricing, and then issue a purchase order for each individual instance of ordering. Contracts may be renewable whereas purchase orders are not – a subsequent order will usually require another purchase order.

In terms of legal enforcement, a contract is a legal document from the outset with the signature of both parties. A purchase order only becomes legally binding at the point at which the seller accepts it. There may be regulations specified in a purchase order in the same manner in which a contract will itemize terms and conditions.

In a nutshell, a small business (or any business) should only issue a purchase order when there is a true intent to buy any particular product or service. To avoid further headaches and legal issues, the more specific your purchase order is the better. Vague information often leads to errors. Be as specific as possible.

The basic information to include on your purchase order:

  • PO number: To expedite communication about an order as well as internal tracking and auditing
  • Dates: Date of issue and requested date of delivery
  • Contact information: Buyer’s and supplier’s address, phone, email
  • Shipping address
  • Payment terms
  • Item number and description
  • Quantity
  • Color and size (if applicable)
  • Cost of goods

Req2PO was designed to streamline both purchase requisitions and orders for small business. It will enable small businesses to better manage their expenses and provide a foundation for purchasing procedures while eliminating time-wasting redundancy that often occurs between the point of requisitioning and placing the order.