Purchase orders in construction 101

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purchase orders in construction

A purchase order in construction is similar to a contract, as it is a request from one person to another about purchasing an item. While any purchase order can, and normally is, viewed as a contract, it should never be considered as a true contract.

The reason for this is that a contract is more detailed and includes products, prices, and terms and conditions of the project.  While a purchase order can include a couple of those same things, they are always a one-time contract that focuses only on the product that the purchase order is for. 

Read also: How to reduce construction delays by more than 20%

It can be quite confusing to those outside of the construction industry, or those who are just starting out, but it is necessary to keep these two items straight to avoid any conflict with a project later on!

Anyone who is filling out purchase orders in construction should ensure that they include the descriptions of the products, technical aspects that may be necessary to know, the quantities that they want to order, the discounts that they will receive, and obviously the prices of the products. It is also a good idea to include the shipment dates, as well as the expected payment terms so that there is no confusion afterwards.  

Any purchase order in construction that is filled out in detail, is going to be approved much faster than those that are missing pertinent information. Therefore, every contractor should make sure that each purchase order they create has the necessary information. Otherwise, the order will be returned with request(s) for additional information. 

How does a purchase order work?

In short, the purchase order process is based on the following steps: (1) creating the purchase order, (2) getting the purchase order approved, (3) dispatching, (4) delivery, (5) invoicing, and (6) closure. In between these six purchase journey points are budget checks, contract management, and quality checks

The purchase order becomes legally binding once the buyer accepts it. It details the required materials, the agreed price, delivery expectations, and payment terms. In principle, the purchase order provides definite instructions for the buyer while supplying a solid paper trail for the procurement process. 

Again, once the person writing the purchase order out sends it to the other person to accept, and they do just that, the purchase order becomes a legally bound contract. In other words, there is no way for either party to break the contract, or purchase order, without a lawyer getting involved and the possibility of an impending lawsuit. 

What is the purpose of a purchase order?

A purchase order is used when a purchaser wants to buy materials, equipment or services on credit. The purchase order serves as a risk-protection document for when a supplier delivers purchased items prior to payment. In addition to the legal protection the purchase order offers, it can also have a significant effect on inventory and payment management. 

Suppliers also use purchase orders to track when payments have been made on certain orders. Buyers also use purchase order copies to monitor the timely receipt of delivery of ordered materials. 

purchase orders

Since purchase orders are so important in the construction industry, it is important that everyone keeps track of the purchase orders that they have sent out and which ones were accepted or denied. Having these purchase orders handy and easy to find ensures that any issues can be addressed quickly and resolved immediately.

Whenever a purchase order goes missing, work on the project at hand can come to a stop, due to the fact that no one will want to continue until they know exactly what both parties want and need, and everything is back on track. These delays can cause projects to go over budget and past the completion deadline, which are two things that neither party will want. 

Some contractors may not feel that it is necessary to complete a purchase order for every little item that they want or need to purchase, especially if they have been working with the other person for years. However, it will only take one misunderstanding for a partnership to go sour, and purchase orders are created to avoid problems like that.

How do you create a purchase order?

A purchase order is usually prepared by the buyer through their purchasing department. Purchase order creation is typically done with the help of an electronic software system (to better track and submit orders electronically). As mentioned above, the created order includes a purchase order number that matches the purchases with the delivery using the (1) shipping date, (2) billing address, (3) shipping address, (4) request items, (5) quantities, and (6) price. 

Of course, there are many problems when it comes to purchasing orders in construction, but the major ones are how a contractor should store them.  While it is easy to say that they will be safe and sound in a manila file in a filing cabinet, that is not quite the truth. Every project can have hundreds of purchase orders, which means finding the exact one that is needed within a sea of papers is next to impossible. Plus, those papers are never where contractors need them to be, especially if they need one of the purchase orders when they are on the job site. 

Thankfully, technology has come quite far in recent years, and purchase orders in construction can now be saved and stored online. There are many different types of software that offer this option to contractors and they can be used for more than just storage. 

Purchase order software can now be used to create purchase orders in construction, track those purchase orders to know when they have been approved or denied, and even track when the purchase orders have been completed with the products delivered and the purchase order paid in full. 

The difference between a purchase order and a contract

A purchase order is a document created by the buyer and sent to the supplier to request or order products or services on credit. It includes order descriptions, quantities, prices, payment terms, and shipping dates. Upon the acceptance of the buyer, the purchase order becomes legally binding through the agreed product transaction between the buyer and supplier.

On the other hand, a contract is a legal document that details the products, agreed prices, and payment terms and conditions with the value and number of purchase orders and invoices sometimes attached. 

Remember, purchase orders only become legal documents when the buyer accepts it while a contract is a legal document at the beginning. Purchase orders have zero value unless approved by the supplier while contracts already have legal value.

Conclusion

Purchase orders in construction are never going to go away, and in fact, they may get slightly more complicated since more information may be required for each one in the future. However, contractors can feel a little relief knowing that software can help them keep track of it all and even help them fill most of each purchase order out. This ensures that they won’t spend hours on purchase orders and nothing will fall through the cracks either. 

No one loves purchase orders in construction since they can be time consuming and annoying. However, since they can save “he said, they said” scenarios, every contractor should do their due diligence and have one for everything that they purchase.

If you want to learn more about how you can digitalise your construction processes and finally meet your objectives of deadlines, budget and compliance download for free our ebook on the 6 keys to staying competitive.

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