Purchase Order or Contract?

Jun 28, 2021

Purchase Order or Contract?  Factors for SMEs to consider. 

Purchase Orders are widely used in the GCC market, often as the principle commercial contract when making a business-to-business purchase.  

There are many advantages to using Purchase Orders, including:

  • clear, easy-to-read and concise format stating quantities and prices of the items;
  • familiarity (your employees and your customers have probably worked with   purchase orders before);
  • may include standard delivery and payment conditions and an expiry date. 

 

Small and Medium Enterprises should consider at what point the Purchase Order will be too simplistic for the purpose of a particular purchase or project. 

Factors to consider in evaluating whether a Purchase Order should be supplemented by or replaced with a longer-form sale of goods or services contract:

  1. Value – consider the value of the items or services being procured; not only the market value but the value to your operations.  If the purchase price or the criticality of the purchase could have a substantial impact on your operations then you will want to consider whether your interests are sufficiently protected by a standardised form.
  2. Duration of term – a one-off purchase may lend itself easily to a purchase order.  If your business requires a regular, ongoing supply of items or services then you will want to negotiate the best deal you can with the supplier and to ensure that special terms are recorded in the contract.
  3. Payment plan – a bespoke contract will allow for more complex payment arrangements such as a diminishing price scheme, instalment plan and/or provision for periodic adjustments.
  4. Insurance – for fragile or perishable goods consider whether you would benefit from clear provisions as to which party is responsible for insuring the items at each stage of the sale; for services consider whether any insurance would be required for personnel or equipment, for example.
  5. Delivery – delivery instructions and Incoterms can be included in a purchase order.  If there are any unusual or complex elements (e.g. hazardous goods) then a contract signed by both parties is the best way to provide clarity and detail about obligations.
  6. Faults / Delays / Other Issues – solid and unambiguous terms regarding the remedies for fault in the goods and services provided can avoid potentially costly and time-consuming disputes when things don’t go to plan

Prism Supply Solutions offers a comprehensive set of Free Tools available to download from our website, including a template Purchase Order and a Guide to Incoterms 2020.  

Prism Supply Solutions also offers our members exclusive access to a template supply of goods and services agreement contract and a template non-conformity report.