Purchase order

What it means

A purchase order is a customer’s written statement that it wants specific goods or services from a supplier at a stated price, in an agreed quantity, by a given date and on stated terms. It may follow a price quote or itself be an offer to conclude a contract.

Legally an order is either acceptance of an offer, in which case a contract is formed, or an offer that the supplier must confirm. Confirmation with reservations is a new offer. For repeat deliveries, orders are often tied to a framework agreement that sets the general terms.

In practice the order is the reference document for the whole transaction. Its number appears on the delivery note and the invoice, making it possible to check that what was ordered was delivered and invoiced.

How it works in practice

We recommend a system in which every significant purchase starts with an order approved by an authorised person. When the invoice is processed, three documents are matched: order, delivery note and invoice, which catches errors in price and quantity as well as fake invoices.

The order should state clearly whether prices include VAT, the delivery time and place, payment terms and a reference to the terms and conditions that are to apply. If the parties’ terms conflict, the question is whose terms were accepted.

In the public sector and with partners required to publish contracts, an order may also have to be published. When working with them, expect its details to become public.

What to watch out for

The most common mistake is ordering only by phone or messages with no written record. In a dispute over quantity, price or date there is nothing to prove what was agreed, and supplier and customer each claim something different.

The second risk is a battle of the forms, where both sides send their own terms and neither accepts the other’s expressly. In a dispute it is hard to establish which apply. For important deals the terms are better agreed explicitly.