Much of your project will be done in-house, but you’ll likely also contract with suppliers and others to deliver needed materials or services. How do you make sure that the goods are of the type you need, the quantity agreed upon and for the price that meets your financial constraints?
These parameters are all agreed upon through a purchase order. It’s a way to reach an agreement about the outside services required in the project to make sure you can schedule them into your project plan.
What Is a Purchase Order?
A purchase order (PO) is a legally binding contract between a buyer and a seller that details what the buyer wants and what the seller agrees to deliver. Those details include the price, quantity, date of delivery and terms of payment.
Purchase orders also include a PO tracking number. Depending on what type of system you use, this is instrumental in tracking the purchase—from the time it’s placed to when it’s delivered and paid for.
Purchase orders originated as paper documents and are still used this way in many industries. However, as businesses migrated to computers, the PO has followed suit. There are systems that streamline the purchasing process to help track inventory and payment.
Who Creates a Purchase Order?
Larger companies may have a purchasing department dedicated to overseeing purchase orders. Smaller companies may rely on operations managers, financial managers, office managers or even business owners to create the purchase order.
Specific teams may appoint designated individuals to create purchase orders. For example, software companies may appoint office managers to create purchase orders while a finance company may appoint financial managers to create purchase orders. How a company sets up its purchasing process will dictate who creates purchase orders.
Who Approves Purchase Orders?
Who approves purchase orders depends on the process in place within a given company. Larger companies may have fleshed out purchasing processes consisting of approvals stemming from specific locations and departments. As an example, a software company may look to both directors and Chief Financial Officers (CFOs) to approve purchase orders.
Smaller companies may turn to either the CFO or CEO for purchase order approval which has the potential to slow down the process in some cases.
Why Use a Purchase Order?
The purchase order makes exactly what a buyer wants from a seller clear. It helps to avoid any confusion in terms of what a buyer wants, how much of it, what the cost will be, when and where it’ll be delivered and so forth. The purchase order serves to protect both the buyer and the seller. For example, if a buyer doesn’t pay as agreed upon in the order, or the seller doesn’t fulfill the details of the order, they can pursue legal avenues to get their money, goods or financial compensation.
Of course, a lawsuit is not what any project manager wants. Therefore, the purchase order acts as a legal document to avoid any such disagreements by creating clear communication between both parties. It ensures that everyone involved in the project agrees upon the goods or services being procured.
Practically speaking, a purchase order simply helps to track an order, which is essential as projects change and resources must be reallocated to reflect those changes.
Elements of a Purchase Order
A purchase order varies in detail, but all share the following elements:
- A PO number to identify and track the order
- A PO date to capture when the order was agreed upon
- Vendor information, including the name of the vendor and their contact
- Buyer’s contact information
- A delivery date for when the goods or services are due
- Shipping method, if the goods are being shipped to a job site
- Any requirements for shipping
- Items that are included in the order
- The cost for each item
- The total cost of the entire shipment
- Taxes for total items purchased
- Payment due date
- Terms for payment
Your business might need further detail, which is fine, but if you have at least the above information in your purchase order, the owner and vendor are protected by contract. Therefore, to legally protect all parties, it’s critical that all the details of the transaction are clearly stated and agreed upon.
A Purchase Order Example
Let’s take a look at a theoretical purchase order example to get a real-world view of how this process works. To do so, we’ll use ProjectManager.com’s purchase order template, which you can download for free here. Imagine a construction job, where Acme Construction realizes they need more particle boards.
They contact their vendor, Joe’s Lumber, and discuss the order over the phone. Coming to an agreement about price and delivery, Acme writes up a PO. They include their company name and contact information, create a PO number, date and vendor ID for Joe’s.
Vendor Contact Info
The next part of the purchase order is the contact info for the vendor, or who Acme is making the purchase from. This is followed by where the goods will be shipped, in this case, the job site. The approved delivery date is noted and the method of shipping, which in this case is by truck.
What follows are details about payment, when it’s due and if there are any terms. In this case, the payment is due upon delivery and only after the contact person listed in the shipping information has looked over and approved the wood.
Line Item Information
There’s a list of the goods, showing the item, describing it, the quantity, quoting the unit price and then a line total. For this order, there is only one line item, but there can be several. However many there are, they are totaled after the taxes for the purchase are added.
There is a box in which any additional information can be added. This might be how to reach the job site, how the goods need to be packed, etc. For this job there is no need for additional information, and the box can be left blank.
Finally, there’s a place for the signature of the vendor and the date on which the purchase order is signed. Once signed, this becomes a legally binding contract.
Purchase Order Process
The purchase order process includes writing it up through to delivery. The PO process breaks down into the following steps.
Once a purchase requisition has been made, the purchase order is generated, usually by the procurement team or an administrator to the project.
If everyone involved is in agreement to the items, quantity, price and delivery requirements, the document is approved by the signature of the vendor agreeing to the terms.
The purchase order is sent to the vendor through whatever channel has been accepted. This can be done in person, by paper, sent by fax or email, etc.
The vendor delivers the goods outlined in the purchase order. Those goods are examined and approved when the quality is acceptable, such as no defects or missing items. This is usually done by an administrator or procurement manager on the job site.
If everything is fine with the order an approval invoice is sent to financing for payment processing. Once paid, the purchase order is closed.
Purchase Order vs. Invoice
You may have heard purchase orders and invoices used interchangeably, but it is important to differentiate between the two. Purchase orders outline the goods and services that a buyer is interested in purchasing, and they include details such as date of purchase, buyer details, order information, delivery information, payment terms and a PO number. Buyers send purchase orders to vendors to help keep track of the purchasing process.
Invoices, on the other hand, acts as a payment request sent by the vendor to the buyer as soon as the order is fulfilled. In addition to listing the goods and services that were delivered, it also outlines how much money is owed. Invoices typically contain an identifying number, vendor information, payment details and how much is due.
When trying to differentiate purchase orders vs. invoices, remember these key differences:
- Buyers send POs to vendors to monitor and control the purchasing process
- Vendors send invoices as an official payment request to buyers once the order is fulfilled
Both purchase orders and invoices are important documents outlining the details of the items being purchased.
How ProjectManager.com Can Help With the PO Process
ProjectManager.com is an award-winning project management tool that organizes work for greater efficiency. Using our software to streamline your purchase order process allows you to generate, track and close your purchase orders easier so you don’t have to get pulled away from managing the project.
One of our project views is the kanban board, which visualizes workflow. The board is a series of columns with cards stacked underneath that can be dragged and dropped from one column to the next as they move through the purchase order process.
Once you have a procurement need, you can use the customizable columns to outline your five-step purchase order process. Create a card to represent the purchase order. Attach the actual purchase order to the card and move it across the board as it is approved, delivered and closed.
Your procurement can be tracked at a glance to make sure it’s delivered on time by creating a due date on the card. Add tags to designate it to a department or project and make it easy to find in a search. You can even assign the card to your procurement manager and comment to keep the lines of communications open.
ProjectManager.com is an award-winning tool that helps you stay organized to improve productivity. It can manage your purchasing, planning, monitoring and reporting on projects. Join organizations like NASA, which already use our tool to run successful projects. Try this free 30-day trial offer today.