What are blanket purchase orders and when are they useful?

Follow

A blanket purchase order is an agreement negotiated by the purchasing department with a vendor to deliver goods and services at a specific price on a recurring basis for a specific period of time. Blanket POs benefit the buyer by locking in a specific unit price and quality expectation, while offering vendors a commitment to purchase for a period of time.

Blanket purchase orders are essentially short-term contracts. According to TAPN advisory consultant Tom Nichols, blanket POs are typically in place for 12 months and are renewed annually if needed. They are established when the buyer needs to make recurring payments for a specific period of time.

"If you have a specific project going on and it has a definite start and end date and there is repetitive material that would be ordered, that would be a good case for the blanket purchase order," Nichols says. "This works best for some lease agreements with vendors and for paying contract labor."

For instance, if an organization is leasing computer monitors, a blanket purchase agreement would allow them to lock in a price. But, because blanket purchase orders are only used when purchasing specific items, the agreement only covers monitors. If the buyer wanted to lock in rates for other items, they would have to negotiate another blanket PO. Many organizations opt to use a purchasing card or a ghost account when buying multiple small-dollar items from a vendor.

In addition to locking in a unit price, blanket POs are beneficial when the quality of the items is especially important. Similar to other procurement contracts, blanket purchase orders clearly state the specifications of what the buyer is purchasing. Disputes over quality can be easily resolved by referring to the blanket purchase agreement.

When a buyer needs to make a purchase using the blanket PO, they issue a release against it. Information on the release includes the individual authorized to make the purchase, the amount of goods/services, and the value - all information that would be found on a traditional purchase order. Suppliers then use the information on the release to issue an invoice.

While blanket purchase orders benefit organizations by locking in quality and terms, there are some mistakes that can compromise the blanket purchase agreement. Nichols says the most common mistake is that buyers are not monitoring the agreements. Blanket purchase orders usually have a time and dollar limit. If the agreement expires or the maximum dollar amount is exceeded, the items are charged at the general rate.

"There is no audit trail," Nichols says. "The purchasing department is not tracking the agreement. For example if you have an arrangement where you are leasing a PC from a vendor and all of a sudden the blanket purchase order has expired, you're now paying the month-to-month price, which is considerably higher."

Development and maintenance of a blanket purchase order agreement falls with the purchasing department. However, to prevent purchases from being made after the agreement has expired, Nichols recommends that accounts payable also keep copies of all blanket purchase order agreements.

"The responsibility's really with purchasing," he says, "but with a good relationship, accounts payable can send a warning memo letting them know that the agreement needs to be renegotiated or it needs to be cancelled."

Have more questions? Submit a request

Comments