A purchase order is a (generally) binding document issued by the procurement department of a buy organization (EPC, End User and, trading companies) to a manufacturer, a stockholder or a trading company that defines the terms under which a purchase of project materials or services is done. An order confirmation is a document issued by a seller confirming, to the buyer, the terms under which the received PO is accepted. Any discrepancy between the purchase order and the related order confirmation shall be clarified before the delivery process starts, to prevent future litigation. 

 

PURCHASE ORDER DEFINITION

A Purchase Order is an administrative document issued by a buyer (i.e. an importer) that specifies the quantity, the quality, the unit and total price of some goods or services that a supplier has to provide, as well as the general terms and conditions ruling the purchase such as delivery, delivery terms (Incoterm), payment terms, payment means, legal conditions etc.

Buyer and supplier generally negotiate all these terms based on commercial offers, proposals, bids exchanged and discussed beforehand.

The sourcing process for project materials and services works according to the following general process:

  1. Buyer floats RFIs, RFPs, RFQs
  2. Sellers respond and submit quotes (technical and commercial) or proforma invoices
  3. Buyer evaluates the competitive technical and commercial offers via technical and commercial queries or negotiations
  4. Buyer identifies a short list of suppliers and defines, finally, the allocation of the order (to one or multiple suppliers)
  5. Buyer issues the purchase order(s) and sends it to the awarded suppliers
  6. Seller confirms the purchase order

As all these steps are completed, the seller(s) starts the delivery process and invoices the buyer.

Upon delivery, the payment terms agreed in the PO set the due date for suppliers’ invoices.

Example of purchase order

A PO template can be downloaded from this page.

 

PURCHASE ORDER CONFIRMATION

The purchase order confirmation is a document issued by a seller that received an order from a buyer.

The confirmation outlines the acceptance (total or partial) of the conditions set by the buyer in the PO (quality and quantity of the items, price, delivery, terms of the deal). If the confirmation confirms the PO totally, then the parties are legally bound to the transaction as per the terms set therein. If the confirmation raises any discrepancy, buyer and supplier have to re-negotiate the terms of the PO. Non perfectly matching documents represent different expectations for buyer and seller and expose both to the risk of litigation. Unclear agreements shall be avoided. It is therefore important that buyer checks the confirmation against the PO, and contacts the seller in case any discrepancy is found.

 

PO LEGAL VALUE

If a buyer issues a PO and the seller confirms it, the parties are (both) legally bound to the transaction. Therefore, in most cases, a PO has the same strength of a more formal “sales and purchase contract” (contracts are used instead of POs, generally, for more articulated and complex transactions).

CAN A PO BE CANCELLED?

The possibility for a buyer to cancel a PO after its emission depends on the clauses accepted by the seller at the time of the order confirmation. The GTC (general terms and conditions) of major EPC contractors and End-users foresee a PO cancellation clause, which may entitle suppliers, or not, to recover the costs incurred between the date of acceptance of the order and the date of the order cancellation.

 

PURCHASE ORDERS TERMS

UOM (Unit of Measure, Unit of Measurement)

UoM stands for “unit of measurement” or “unit of measure”, i.e. the type of measure to express the quantity of a product (example: meters, eaches, tons, etc.). UoM is an important indicator in RFQs, bids, contracts and other commercial documents to make sure the parties agree on an exact quantity of goods to be sold and purchased.

The table below shows the most common American and European unit of measures and their conversion factors:

MOQ (Minimum Order Quantity)

MOQ means “minimum order quantity”, i.e. the minimum order that a seller is willing to deliver under a single order. The minimum order quantity is higher in B2B than B2C business (1 unit could be a sufficient quantity for retail sales), and is related to the economic batch of production.

MOV (Minimum Order Value)

MOQ differs from MOV, which is the “minimum order value”, i.e. the lowest amount of a purchase order that a seller can accept and confirm. A minimum order value is set to prevent small orders which generate high handling and overhead costs, which may be not compensated.