It is common to think that purchase order and contract are the same things. Although they both deal with business expenses, there are some important distinctions that you need to be aware of before you use them for management requests.
Sales are managed and recorded in an organization’s accounting records using both contracts and purchase orders. What makes them distinguishable is when they are issued and what they accomplish. In other words, a purchase order is a bill that a buyer business delivers to the seller before finalizing the deal.
The seller business will then deliver the buyer a document that confirms the acceptance of the terms and conditions of the purchase order, making it a legally binding contract between the two businesses.
The distinctions between contracts and purchase orders, the complex sets of terms, and the details included in each, are covered in this article. Let’s start by taking a closer look at the definition of a contract and a purchase order.
What is a Purchase Order?
A purchase order is typically listed from a buyer to a seller seeking an order for a product or supply. A purchase order is often generated from a purchase requisition, also known as a purchase order request.
The purchase order document records essential details about the product the buyer needs to buy. Along with the terms of payment and delivery information, it specifies the kind and number of things needed. The purchase order request is approved by the purchasing department head or buying manager, which becomes a purchase order.
A purchase order’s clarity and simplicity make it perfect for almost any employee to quickly draft one and submit it for approval to the relevant purchase requisition department.
What is a Contract?
A contract specifies the goods being sold, the rates to be charged, and the terms and conditions of the blanket purchase agreement for a specific period. The prices and quantities listed on the purchase order are also disclosed in the contracts.
Contracts come in a variety of sizes and shapes, can be bilateral or involve numerous parties, have a variety of functions and highlight utterly distinct facets of the complex set of terms.
One should overlook the widespread belief that contracts are more complex than purchase orders when determining which document to utilize and use contracts as a single legally binding contract.
Difference Between Purchase Orders and Contracts
To proceed confidently with a business transaction you need to be aware of the differences between the commercial documents of contracts and purchase orders. At first glance, a purchase order and a contract may be hard to distinguish from one another. The fact that some purchase orders are not contracts adds to the complexity of the situation.
The difference between these two is not immediately obvious. When choosing which legal document to utilize when making purchases for your business, take into account many crucial factors.
There aren’t many distinctions between a purchase order and a contract, and you should be able to find the right legal documents for your subsequent business transaction. Even though both a blanket purchase agreement and a contract are essential steps in the purchasing process or purchase requisition, they serve different purposes.
Long-Term Vs Short-Term
Purchase orders are for single business transactions, whereas contracts are the formal contract of the ongoing relationship between your company and the seller. The duration of the two-page commercial record is the first difference between the two.
A purchase order must adhere to the terms and conditions outlined in the documents for the duration of the agreement. Contract renewal options are available to renew contracts or change management requests.
If you have a one-year contract with a vendor, you must include the terms and conditions in all purchase orders with that vendor during that year to ensure that everything is still following the terms of the contract.
Risk Factor of Purchase Order and Contract
Due to the prospect of getting a significant return at significant risk, a legal instrument serves as a safety net. Contracts provide the option to define roles, set performance requirements, and reduce risk exposure more precisely than purchase orders.
The riskier the commercial deal, the contracts are used as a better resort. Because a purchase order doesn’t have the same legal standing as a contract, this is the reason. Contracts are preferred when there is a high level of risk because they specify the responsibilities and demands of each party.
Contracts may also define performance expectations. Contracts should be utilized in conjunction with a purchase order because they frequently do not define quantity and delivery criteria.
To commit payment funds for the contractual goods/services it is advised that one or more purchase orders be issued with the contract reference whenever possible to lower the danger because contracts do not define quantities or delivery dates.
Difference Between Contract and Agreement
Even though you may already be aware of what a contract is, an agreement only exists when one party accepts the offer made by the other.
When one person or entity makes an offer or proposition to another, and that other person or entity accepts it subject to all applicable terms, the agreement is deemed to have been made.
| Basis | Agreement | Contract |
|---|---|---|
| Meaning | A proposal made by one party to the other as a condition of a contract may be accepted by both parties. | It is a written document with legal standing referred to as a contract. |
| Elements | Agreement = Offer + Acceptance | Contract = Agreement + Enforceable by Law |
| Written Form | The agreement need not always be in writing. | Normally, a fixed-price contract is documented in writing. |
| Scope | A contract’s scope is more restricted when compared to an agreement’s. | The scope of a contract is more constrained than that of an agreement. |
| Risk | The danger element has been raised since the law does not make it enforceable. | A contract makes sure there is no danger because it complies with the law. |
| Comparison | Not every agreement satisfies the requirements for being a contract. | All purchase agreements are regarded as being in contracts. |
| Legal Obligation | It does not create a legally binding obligation. | Contracts enforce legal obligations between the parties. |
| Consideration | Agreements can be reached with little consideration. | A contract needs to be carefully considered. |
Difference Between Invoice and Agreement
An invoice is not a legal contract because it does not prove that a contract exists between two or more parties. Instead, a business will send a client a single invoice to request payment for its services.
The main difference between the two can be seen below.
| Agreement | Invoice |
|---|---|
| An agreement is a documented promise between two parties for a sale or business. | An invoice, on the other hand, is a written request for payment for services made by one party and given to the other party; it is not a two-party contract. |
| It is usually informal and can be found in an unwritten format between two parties. | An invoice is a written communication from the seller to the buyer. |
| An agreement is a mutual trust-based contract hence the need for documentation and software is rare. | A software program like Moon Invoice for making invoices may do it electronically. |
When Should you Use a Contract and PO?
A blanket purchase order and a contract are both useful tools in the purchasing process, but they serve different purposes. While contracts are used to pay for goods and services, purchase orders are mostly used for single short-term purchases made.
To select the best documentation for any circumstance, you must also be aware of your purchase objectives. Contracts are preferred for developing long-term connections with consumers; purchase orders should only be used for one-time, brief-term transactions.
Due to their stronger legal standing, contracts should be used with any transactions that carry a higher level of risk. Instead of selecting one at random from the two, think about the circumstance first, and then select the better option. If you want to maximize your chances of success, your business requires a dependable software solution to manage contract and purchase orders for all projects.
Conclusion
Purchase orders and contracts are both used by construction companies when making purchases of goods or services. Despite having some similarities, it’s crucial to recognize how they differ to use them correctly and in the right circumstances. Using contracts or purchase orders has implications because each legal document reflects a distinct purchasing strategy. Instead of choosing one at random, businesses should consider the scenario before making the better choice. Businesses must also use top-notch software to manage these kinds of legal documents for each project.
FAQs
Jayanti Katariya is the founder & CEO of Moon Invoice, with over a decade of experience in developing SaaS products and the fintech industry. He holds a degree in engineering. Since 2011, Jayanti's expertise has helped thousands of businesses, from small startups to large enterprises, streamline invoicing, estimation, and accounting operations. His vision is to deliver top-tier financial solutions globally, ensuring efficient financial management for all business owners.
