Article

Construction Purchase Order 101: Your Ultimate Guide to PO

Construction purchase orders are key financial elements of an overall project contract. In construction specifically, a purchase order (PO) is typically validated by two parties: the buyer and seller. The buyer (usually an owner or general contractor) issues a PO to the seller (usually a general contractor or specialty contractor) to cover the cost of the project. 

The document outlines the price and quantity of goods or services necessary to complete the project contract as agreed upon by both parties. 

Chapter 1

What Information Does a Construction Purchase Order Contain?

In order to illustrate the contents of a construction purchase order and how they are relevant to the completion of a project, let’s use a hypothetical scenario featuring Jane and John. Let’s say Jane is a project manager at a GC hired to build a warehouse while John is a concrete contractor who won the bid to pour the foundation of that warehouse.

Description of Deliverables 

Upon receiving the bid for the concrete pour, John and his team visit the site. They identify the tools, equipment, materials, and labor needed to complete the project. Once he relays that information to the GC, Jane’s team will draft a PO for the deliverables outlined by John and his team. 

Number of Deliverables

As Jane’s team is drafting the PO, they have to be diligent with listing the quantities for each deliverable provided by John. This is important because a PO explicitly states the GC’s fiscal responsibility for the deliverables needed to complete the work expected of the specialty contractor. This document, therefore, protects both parties by ensuring that:

  1. the GC receives the amount and quality of work requested.
  2. the SC gets paid for the items needed to complete the work requested.

Agreed-Upon Cost

As Jane’s team lays out the itemized list of deliverables requested by John’s team, the two parties will agree on a cost per item and possible discounts for certain quantities of those items. 

Terms of Payment

The terms of payment for a construction purchase order are usually based on credit. The GC sends the PO to the SC to request a service on credit. This protects the GC in the event that payment is given before the completion of the project. 

The terms of payment can also be set in regards to a net payment term. It defines how many days after an invoice is submitted the buyer has to make the payment. In this scenario, we will say that Jane approves a PO with a net 30 term, which means John will be paid within 30 days of submitting an invoice for the completed work. 

Due Dates

Now that the parties have agreed to the terms of payment, Jane and Johns’ teams will decide on due dates for the deliverables requested in the PO. These dates will inform the date of delivery of those deliverables.  

Method of Delivery

One of John’s deliverables in the PO is an extra concrete mixer that has to be shipped from out of state. The delivery method for that mixer will typically be defined as one of two FOB (Free On Board) shipping terms: FOB Shipping Point (or FOB Origin) and FOB Destination. If “FOB Origin” is agreed upon, the GC will become responsible for any loss or damages incurred to the mixer as soon as it leaves the warehouse and is in transit to the job site. If “FOB Destination” is agreed upon, the SC will be responsible for any damage incurred to the mixer until it reaches the job site. 

Reference Numbers

The reference number is one of the most important pieces of the construction purchase order—it helps track the document. Since a project can have hundreds of PO’s attached to it, they can commonly become lost or jumbled during a project’s lifetime. The only way to prove that a service or material was completed or delivered as requested is to be able to locate the respective PO by its reference number. 

Chapter 2

Difference Between a Purchase Order in Construction and an Invoice

There is one main difference between a construction purchase order and an invoice. A PO is submitted by the buyer (Jane the GC) to determine the cost of a contract before the work is completed. In contrast,  an invoice is submitted by the seller (John the SC) after the work is completed to receive an agreed-upon payment.

Chapter 3

Difference Between a Purchase Order in Construction and a Contract

The difference between a construction purchase order and a contract is that a contract is a legally binding document that covers products, agreed prices, and payment terms, and conditions for the entirety of a construction project. It includes all necessary purchase orders (documents that outline the price and quantity of goods or services necessary to complete the project contract) and invoices.

Chapter 4

Conclusion

A construction purchase order is a key item in a project contract because it’s a legally binding document that protects both the buyer and seller of a product or service. When drafting a PO, it’s important to remember to be explicit and detailed when filling out the following sections:

  • Description of deliverables,
  • Number (or quantity) of deliverables,
  • Agreed-upon cost,
  • Terms of payment,
  • Due dates,
  • Method of delivery,
  • Reference Numbers.