How to Decide between Using Purchase Orders and Purchase Agreements

Jan 17, 2022 | Basic 101: Introduction to procurement

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Jan 17, 20222 min read

Understand the Key Differences between Purchase Orders and Purchase Agreements for effective procurement management. A purchase order is used for simple, one-time purchases, while a purchase agreement is used for larger purchases with detailed legal provisions. Both documents are legally binding and it's important to review and consider their terms before signing.

Many business owners may not be aware of the differences between purchase orders and purchase agreements. Both are documents used to purchase goods and services, but the two documents have distinct differences. Understanding these differences can help business owners make informed decisions when it comes to purchasing goods and services for their business. 

Understanding the Key Differences between Purchase Orders and Purchase Agreements 

A purchase order is a document used to order goods and services from a vendor. It is issued by the buyer, who is typically a business, and sent to the vendor who is providing the goods or services. It includes details such as the type of goods or services being purchased, the quantity, price, payment terms, and any additional terms and conditions. Once the purchase order is accepted by the vendor, it becomes a legally binding contract and both parties are obligated to fulfill their parts of the agreement. 

A purchase agreement is a more detailed document than a purchase order. It is a legally binding contract between a buyer and a vendor that outlines the terms of a specific transaction. The agreement includes all the information included in a purchase order but also includes additional legal provisions such as indemnification, warranties, and other liability protections. It is often used when a business needs to purchase expensive items or enter into a long-term business relationship with a vendor. 

It is important to understand the differences between purchase orders and purchase agreements, as they are both legally binding documents. A purchase order is typically used for smaller transactions, while a purchase agreement is used for larger, more complex transactions. It is important to read and understand the terms of both documents before signing, as they can have significant legal implications. 

When to Use a Purchase Order vs Purchase Agreement 

Purchase orders should generally be used for simple, one-time purchases that don't require long-term commitments or complex legal provisions. For example, if you are ordering office supplies from a stationary store, you would typically issue a purchase order. That being said, purchase orders can be used for longer-term agreements such as when you are ordering materials from your vendor for an extended period of time. 

Purchase agreements should be used for larger purchases that require more detailed legal provisions. This can include situations like entering into a long-term contract with a vendor for a particular product or service. For example, if you are entering into an agreement with a software vendor for a multi-year enterprise license agreement, you would use a purchase agreement. 

In conclusion, purchase orders and purchase agreements are both important tools for procurement and supply chain management. While purchase orders are used to request goods or services from a supplier, purchase agreements provide a more comprehensive overview of the terms and conditions of a purchase. Understanding the differences between these two documents is important for companies to effectively manage their procurement processes, build strong relationships with suppliers, and ensure compliance with legal requirements. Whether a company needs a purchase order or a purchase agreement depends on the specific needs of the procurement process and the type of goods or services being purchased. In any case, it is important to carefully review and consider the terms and conditions of these documents to ensure that they meet the needs of the company and its suppliers. 

On FactWise Source-to-Pay, an end-to-end comprehensive procurement platform for small and medium sized product manufacturers, purchase order creation is simplified and can be automated to ensure accuracy and efficiency. With our holistic supplier analytics and RfX management analytics, teams can negotiate lower costs and payment terms to maximize their cash flow. Teams can also save multiple templates for differing Terms and Conditions (geographies, supplier terms, goods categories, etc.) to simplify PO creation. FactWise increases savings by up to 25% and efficiency by up to 20%. 

About the Author

Stawan is the founder and CEO of FactWise. Before founding FactWise, Stawan was the NA TMT-Procurement Leader at McKinsey. Passionate about procurement, Stawan has 15 years’ experience in enabling clients of all sizes to achieve business impact via procurement.


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