Differences Between Purchase Orders and Purchase Agreements
Updated: Oct 25, 2021
Defining the difference between a purchase order and a purchase agreement can be confusing. Fortunately, with the right information, understanding the difference between the two is actually quite simple. Read on for a clear breakdown of these two agreements including what they involve, different types, and what sets them apart.
Types of Purchase Agreements
There are numerous forms of purchase agreements. For example, certain purchase agreements involve clear commitments to buy a particular item or quantity. There are also master agreements where additional products and services are added over time to increase purchase options.
There are also purchase agreements that set standard terms for all purchases (unless these particular purchases will be completed through the use of statements of work that add, through reference, the terms of the master agreement). Also, there are purchase agreements that agree to purchase a set quantity whereas purchase orders can be used to schedule certain deliveries. A purchase agreement can also involve the commitment of a buyer to purchase a certain percentage from a supplier (purchase orders can be set up to schedule deliveries against this commitment).
Types of Purchase Orders
Just as there are a number of different purchase agreements, there are also numerous types of purchases orders and uses each of these orders. Purchase orders can be stand-alone documents that agree to make certain purchases.
One type of purchase order is a blanket purchase order. This order is typically used to commit to purchasing a particular quantity of product over an extended length of time. The order involves a fixed term and price along with the possibility of using individual ‘calls’ that may allow a purchase order to schedule a delivery against a blanket purchase order. It is also possible to set up purchase agreements that establish the pull signal as a type of purchase order that leads to the obligation to complete a payment.
A traditional purchase order is typically used to buy from a supplier when no other forms of purchase agreements are in place. When a purchase agreement is in place, purchase orders can be completed in a variety of ways.
What is the Difference Between a Purchase Agreement and a Purchase Order?
The most notable difference between the two deals is the enforceability fo the terms. Purchase orders are not considered binding contracts until they are accepted (either as issued or by performance). If the agreement is accepted with new terms, this is considered a counter-offer and is required to be accepted by the buyer to make the agreement a binding deal. If no acceptance is obtained and a shipment occurs, this is known as a battle of the forms and the terms for purchase must be negotiated.
With a purchase agreement, it is common to find language that states the order is enforceable as long as the agreement complies with the purchase order.
The period of time involved has nothing to do with the difference between the two. Blanket purchase orders can be set up for an extended period of time while purchase agreements can have extremely short timelines.
Also, the difference does not involve the volume. A purchase agreement can involve a single purchase or a number of purchases through a master purchase order.
The level of commitment also has nothing to do with the difference between the two. Purchase agreements can be firm commitments to buy or an agreement that outlines the terms of future purchases. Purchase orders are offers – prior to being accepted, they are not an actual commitment. Purchase orders only become a firm commitment when they are accepted.
Another differentiation between the two deals is that, ideally, purchase agreements should be signed prior to the completion of any work. Purchase orders are not binding until they have been officially accepted. Accepting an order may involve signing an acknowledgement copy or completing electronic acceptance. It may also be accepted by commencing performance.
A purchase agreement requires each party to sign the deal whereas an enforceable purchase order simply requires a signature from the buyer and a form of acceptance from the supplier. Upon acceptance of a purchase order, both a purchase agreement and a purchase order are enforceable contracts and there is no longer a difference between the two.
A final difference between these two deals involves which document is best suited to the situation based on the circumstances of the purchase. A higher potential risk equates to increased involvement of the purchase agreement to ensure the risks are managed appropriately.
Stand-alone purchase orders are typically used for purchases with a lower overall risk that requires a lower set of terms. When a purchase agreement manages a purchase order, the purchase agreement will most likely handle the majority of the risks. If the transaction involves risks that will need to be monitored and managed, the purchase order will be required to include additional or updated terms.