If you’re in the construction industry, you’ve dealt with purchase orders. Purchase orders (POs) are a vital method of ensuring that the project stays within budget. A good understanding of how they work, and how to properly execute them is essential in construction.
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What is a Construction Purchase Order?
A purchase order is a document that confirms an order for construction materials, sent from a buyer to a material supplier or equipment renter. When a purchase order is accepted, a legal contract forms between the two parties and sets basic terms between the parties – like price, payment terms, and time for performance. A purchase order might be followed up with a written contract that further clarifies the relationship and expectations of the agreement.
But let’s rewind real quick.
How are Purchase Orders Initiated in Construction?
It depends! On smaller jobs, or for smaller orders, a purchase order might be submitted directly to a supplier. In these cases, the party submitting the purchase order might be the end customer.
For larger jobs, or for substantial orders, a purchase order may begin with a purchase requisition. Anytime a project manager, contractor, or sub needs building materials on a job site, they’ll send a purchase requisition to their purchasing department. Basically, a purchase requisition requests for permission to make a purchase order. Once the requisition is approved by the purchasing department, they’ll generate a purchase order to send to the supplier.
In either event – purchase orders are created out of necessity. One party needs something, they request to purchase it from a supplier based on certain terms, and then the supplier either agrees, disagrees, or makes a counteroffer.
What do you Include in a Construction Purchase Order?
A well-drafted purchase order is a balancing act. One one hand, it should provide enough detailed information to ensure you get what you ordered. On the other hand, POs should be simple, standardized, and streamlined.
A few of the most important things to include are:
- Description of the product or materials
- Payment terms
- Shipment method/dates
- Order reference number
Any other information can be added. As we said: It’s a balancing act.
Keep in mind – once a purchase order is sent out and accepted, it becomes a legally binding contract. Don’t send out a purchase order unless it’s been carefully reviewed. Otherwise, the right materials may be delivered at the wrong time, the wrong materials may come at the right time, or the final bill may come as a surprise.
Are Purchase Orders the Same as Invoices?
In a word: No! In fact, purchase orders and invoices sort-of mirror each other.
Purchase orders are drafted and sent by buyers which indicates a request for purchase. Conversely, an invoice is sent by the seller once the materials are delivered. Invoices will indicate payment terms and deadlines if payment hasn’t been made yet. Both are legally binding and contain similar information, but don’t mix up this terminology.
Purchase orders detail the contract terms of the sale, while invoices confirm the transaction.
Are Purchase Orders the Same as Contracts?
It’s hard to answer this with a simple “yes” or “no”.
When a purchase order has been submitted and accepted, that purchase order becomes a legally binding contract. So in that sense, yes – a purchase order is a contract. However, an actual contract will tend to be much more detailed than a purchase order. So when a complex transaction is in play, or when multiple purchase orders may be necessary, it would be beneficial to sign a contract as well.
Even a Simple Construction Contract is Better Than a Verbal One:
Benefits of Using Construction Purchase Orders
Purchase orders are a great way to provide a record of purchase agreements in case a dispute arises later. Consider purchase orders as a written trail of breadcrumbs. Let’s say a delivery comes in, and the materials aren’t what was ordered or don’t meet the desired specifications. Without having a purchase order to fall back on as a reference, there’s no telling where the whole thing went wrong. With a clear purchase order in hand, it’s easy to show where the mistake was made.
Depending on the size of your project, there may be hundreds of different purchase orders from different vendors. With clearly detailed purchase orders, contractors and subs not only provide detailed instructions to their vendors, but also a provide solid means of auditing should things go awry.
Keeping organized documentation of every purchase can also reduce the possibility of duplicate orders. The ability to consolidate all purchase information leads to better tracking of payments and expenses, which leads to projects being completed under budget and on schedule.
Document Overflow Problem
One of the biggest challenges facing construction project management is handling the tornado of paperwork. Collecting and organizing everything from notices, payment applications, lien waivers, change orders, the list goes on and on. Adding purchase orders to your seemingly endless stream of paperwork can be exasperating, to say the least.
Technology to the Rescue
Thankfully, we’re living in a digital age, and there are some different software options to manage your purchase orders online. Some of the leading software options can create purchase orders, record approvals, and track when the materials were delivered and paid for in full. Not only does this increased oversight but it eliminates the problem of organizing them efficiently. Additionally, you can help the environment by cutting down on the amount of paper waste.
Here are a few of those software options for construction purchase orders:
Just about everyone in the construction industry uses purchase orders in some form or another. Maintaining a simple and organized construction purchase order system can help boost both efficiency and profits. Next time you issue or receive a purchase order, read it carefully! Be sure that there is enough detail to give both you and your vendor have a clear idea of your agreement. A little extra effort spent on purchase orders can save you time, money and headaches down the line.