It is always advisable to have a binding contract or agreement before money or goods change hands when doing business. A construction purchase order acts as a legal contract between two parties and outlines the basic terms of engagement.
A construction purchase order is a vital part of any project contract. The buyer and seller must validate a construction purchase order. The buyer typically generates a construction PO and issues it to the seller. The buyer is the project owner or general contractor, while the seller is a general contractor working on a project.
This article will describe what construction purchase orders are, how they work and how to execute them in construction properly.
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What is a construction purchase order?
A construction purchase order is a document issued by a buyer to a seller to confirm the intent to purchase construction materials or services. The buyer, typically the project owner, generates the PO and sends it to the vendor, supplier, or contractor. Once the supplier or vendor has accepted the construction PO, the buyer and seller enter into a legally binding contract.
Accepting the construction purchase order means that both parties have agreed on the price of goods or services, payment terms, and timelines for delivery. A construction purchase order might be accompanied by a written and signed contract that outlines the details of the buyer-seller relationship and their expectations based on their agreement.
Construction purchase orders also help control suppliers' purchasing of materials and services and are a tool to keep the construction project within budget. Since one may use a PO as a legally binding, it is essential to retain it for record-keeping.
When is a construction purchase order required?
A construction purchase order is created on a need basis. When one party needs something, be it a product or service, they request to purchase It from a supplier, and the supplier is free to agree to the terms, disagree or make a counteroffer.
A construction purchase order can be sent directly to the supplier for smaller orders. The end customer typically submits the construction purchase order.
Submitting a construction purchase order may vary slightly in large projects. Project managers, contractors, or subcontractors would typically be required to send a purchase requisition to the purchasing team whenever there is a need for construction materials or services.
A purchase requisition is a request for permission to make a PO. The purchasing department reviews and approves the purchase requisition and then generates a PO sent to the supplier.
What to include in a construction purchase order?
Drafting a good construction purchase order is an intricate process. The PO should be simple and standardized yet detailed enough to minimize the odds of the seller getting your order wrong.
It is important to note that a construction purchase order becomes a legally binding contract once it is sent to and accepted by the supplier. This means that there is no room for mistakes. The PO must be thoroughly reviewed before sending it out if the buyer is to avoid any unpleasant surprises.
The PO must include the quantity and description of materials, the agreed cost, the payment terms, due dates, delivery methods, and offer references. The two parties can add any other relevant information to the contract.
Quantity and description of materials
Once a subcontractor has been awarded a project, they will visit the construction site and determine the tools, materials, equipment, and labor required to complete the project. The contractor then communicates their needs to the project manager. The project manager then creates a PO based on the deliverables stipulated by the subcontractor.
The construction PO must list all the deliverables stipulated by the subcontractor because the project manager (representing the owner) has the financial responsibility. In this way, the PO protects both parties. The project manager receives the exact amount and quality of work ordered, while the subcontractor gets paid for all the materials required to complete the job.
The project management team works with the subcontractor and agrees on a cost-per-deliverable and any possible discounts. The PO must state what quantities of which items are discounted where applicable.
A construction purchase order is typically issued with the understanding that the payment is on credit. The subcontractor requests any required construction materials or services on credit. This protects the buyer from financial losses when they make payments before project completion.
Similarly, payment terms may be on a net payment period that defines the maximum number of days the buyer can take to make the payment after receiving an invoice from the subcontractor. For example, a PO with a net 30-day deadline must be paid within 30 days of the subcontractor submitting an invoice for completed work.
The delivery method for materials or equipment ordered can be either Free on Board (FOB) Shipping Point (also called FOB origin) or FOB Destination. FOB Shipping Point means that the owner is responsible for any losses or damages to the materials or equipment ordered when the supplier releases them.
On the other hand, FOB Destination means that the contractor is responsible for any losses or damages to the materials or equipment ordered until they reach the construction site.
Once the payment terms are settled, both parties must agree on due dates for the deliverables requested in the PO. The due dates are communicated to the suppliers to plan for delivery.
A construction purchase order cannot be complete without a reference number. The PO reference number is used to track the construction PO as it could easily be lost among the hundreds of other purchase orders related to the same project.
The reference number is the only way to confirm that service was completed or that materials/equipment were delivered as requested.
Is a purchase order a contract?
No, a purchase order may become legally binding after acceptance, but it is not a contract. A construction purchase order is a document that confirms intent to purchase construction materials or services. However, a contract is a legally binding document that details the products, agreed-on prices, payment terms, and conditions for an entire construction project.
A purchase order is created for each separate order. However, a contract includes all the details of the project and the POs and invoices for that project. The PO is part of a contract.
Is a purchase order an invoice?
A purchase order is not an invoice. The buyer sends a construction purchase order to the seller to determine the contract cost. The seller submits an invoice to request payment for work done. The buyer sends a purchase order before work starts, while the seller sends an invoice after completion.
A construction purchase order is vital because it helps the project manager control purchasing materials or services and stay on budget. The PO ensures that the buyer gets what they order and that a seller is paid for goods and services.