Difference Between Contract and Purchase Order

Key Difference – Contract vs Purchase Order
 

Both contract and purchase order are two ways of entering into a form of agreement. Agreements are commonly found in business and personal transactions and provide validity and distinct terms under which a specific task is to be completed. A purchase order is a type of contract. The key difference between contract and purchase order is that a contract is a legally binding agreement between two or more parties that creates an obligation to do (or not do) a particular task whereas a purchase order (PO) is an official offer issued by a buyer to a seller, expressing the consent to purchase an amount of goods for an agreed price.

CONTENTS
1. Overview and Key Difference
2. What is a Contract Order
3. What is a Purchase Order
4. Side by Side Comparison – Contract vs Purchase Order
5. Summary

What is a Contract?

A contract is a legally binding agreement between two or more parties that creates an obligation to do (or not do) a particular task. Contracts can be formed in a business or personal sense; however, it is described in a detailed manner in law. According to law, the following elements should be present in an agreement to categories it as a contract.

• Offer and acceptance
• An intention between the parties to create binding relations
• Consideration to be paid for the promise made
• Consent of the parties
• Capacity of the parties to act
• Legality of the agreement

A contract can be entered into orally (express contract) or in writing (written contract).

Express Contract

An express contract is formed orally without a written agreement.

E.g. Person A and Person B enters into a contract where Person A is to sell an automobile to Person X for $605,200. The formation of the contract happened through a telephone conversation.

Written Contract

Written contract is an agreement where the terms of the contract are documented in writing or printed version. These are considered more credible than express contracts due to the clear evidence.

E.g. Person X and Person Y are employer and employee respectively. They enter into a contract in writing where Person X hires Person Y to complete a specific task within a per agreed time period.

In business, there are different types of contracts that can be tailor made depending on the company requirement. A few are described below.

• Bill of Sale – A document used at the time of transferring goods from one party to another
• Purchase Order (described below)
• Security Agreement – Agreement between a lender and borrower of a loan
• Contract of Employment – Agreement between the employer and employee that specifies the terms of employment
• Distributor Agreement – Outlines the relationship with a distributor
• Confidentiality Agreement – Agreement to protect the confidentiality of certain information to third parties

Figure 01: A contract is a legally binding agreement between two or more parties.

What is a Purchase Order?

A purchase order (PO) is an official offer issued by a buyer to a seller, expressing the consent to purchase an amount of goods for an agreed price. A purchase order is indicted based on a PO number. Based on the purchase order, supplier delivers or ships the purchased items prior to payment, where the purchase order will serve as legal protection (a contract). Companies use purchase orders to control the purchasing of products and services from external suppliers.

The main advantage of a purchase order is that it allows the customer to check whether there is any discrepancy between what is ordered and what is received. It also reduces the possibility of fraud since all the relevant information such as billing address, shipping date, quantities and price of an order is recorded in the purchase order. From a supplier’s point of view, it makes it convenient to track when payments have been made on specific orders. In this sense, purchase order serves as a beneficial document for both the customer and the supplier. With technological advancements, a number of companies issue electronic purchase orders to conduct the transaction and are referred to as ‘E-Procurement’ or ‘E-Purchase Requisition’.

Figure 02: Format of a purchase order

What is the difference between Contract and Purchase Order?

Summary – Contract vs Purchase Order

The difference between contract and purchase order principally depend on the use and the form they are available in. A contract represents a broader scope whereas purchase order is a type of contract. A contract gives legal protection for the parties involved since it is a popular way of entering into an agreement since a penalty is payable if a contract is breached. All the necessary information relevant to the contract should be specified in order to improve its effectiveness.

Reference:
1. “Basic concept on law of contract.” LinkedIn SlideShare. N.p., 17 Apr. 2015. Web. 25 May 2017. <https://www.slideshare.net/armanhossain1/basic-concept-on-law-of-contract>.
2. “How Does a Purchase Order Work?” Chron.com. N.p., n.d. Web. 25 May 2017. <http://smallbusiness.chron.com/purchase-order-work-40933.html>.
3. Dodd, Clare. “5 critical benefits of purchase orders for small businesses.” Turbine. N.p., 25 June 2016. Web. 25 May 2017. <https://turbinehq.com/2015/benefits-of-purchase-orders/>.

Image Courtesy:
1. “Signature Contract Person Signing A Document” (CC0) via Maxpixel
2. “Purchase Order Request Form” By Pocketbook Travel – Own work (CC BY-SA 4.0) via Commons Wikimedia

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