Parts are often the second-largest cost on a job, after labor. Purchase orders are how that cost stays attached to the job that caused it. Without them, a $900 compressor shows up on next month's supply-house statement and someone in the office spends an afternoon working out which job it was for.
Purchase order in plain English
Say an example HVAC tech diagnoses a failed condenser fan motor that isn't on the truck. The office raises a PO to the supply house: one motor, the model number, the agreed price and PO number 2214, linked to the customer's job. The supplier ships it with 2214 on the packing slip and the invoice. When it arrives, the warehouse marks it received, and when the invoice comes, the office checks it against the PO before paying.
Every step leaves a trail: who ordered it, for which job, at what price and whether it arrived.
What should a purchase order include?
On every PO
- A unique PO number
- Supplier name and your account number with them
- Item, part number, quantity and unit price
- The job, truck or warehouse it's for
- Who ordered it and who approved it, if above your limit
- Requested delivery or pickup date and location
- Your payment terms, if they differ from the supplier's
Stock POs vs job POs
| Stock PO | Job (special-order) PO | |
|---|---|---|
| Purpose | Refill the warehouse or trucks | Buy parts or equipment for one job |
| Cost goes to | Inventory, then to jobs as parts are used | Directly to that job |
| Typical items | Capacitors, fittings, wire, filters | Equipment, model-specific parts |
| Triggered by | Stock below minimum | A diagnosis or a sold estimate |
Mixing them up is a common source of bad job costs. If a part bought for one job goes onto a stock PO, the job looks more profitable than it was and the warehouse shows stock it doesn't have.
How do you control purchasing with POs?
- 1
Require a PO number for every purchase
Tell your suppliers not to release anything without one. Counter tickets with no PO number get questioned.
- 2
Set approval limits
Below a dollar amount, techs or the office raise POs freely. Above it, a manager approves. Pick a limit that catches equipment without slowing small parts.
- 3
Receive against the PO
When parts arrive, mark what came in. Partial deliveries stay open until complete.
- 4
Match before paying
Compare PO, receipt and supplier invoice (three-way matching). Hold mismatches until someone checks.
- 5
Close and review
Close POs when complete. Review open POs older than 30 days weekly.
Common problems a PO process catches
| Problem | How it shows up |
|---|---|
| Price creep | Invoice price higher than the PO price |
| Short shipment | Received quantity below ordered quantity |
| Double billing | Two invoices against one PO |
| Unauthorized buying | Charges with no PO number |
| Parts never returned | Returns sent back with no credit received |
How purchase orders change your job costs: an example
Here is what happens to one example repair job when the part isn't tied to it.
| Example job | Part not on a PO | Part on a job PO |
|---|---|---|
| Price charged | $1,450 | $1,450 |
| Labor cost | $260 | $260 |
| Motor cost recorded on the job | $0 | $410 |
| Gross margin shown | $1,190 (82%) | $780 (54%) |
Without the PO, the job looks like an 82% margin and the $410 motor lands on next month's statement as an unexplained cost. The price book item behind this job looks far more profitable than it is, and nobody raises its price. With the PO, the job shows its true margin the week it closes.
Multiply that by every special-order part in a month and you can see why owners who skip POs are often surprised by their year-end numbers.
Purchase orders and the law
A PO is an offer to buy goods. In most states, sales of goods are governed by Article 2 of the Uniform Commercial Code. Section 2-201 says a contract for the sale of goods for $500 or more is generally not enforceable unless there is some writing sufficient to show a contract was made, signed by the party it's enforced against.1 A PO and a supplier's written confirmation often serve that purpose.
When a supplier accepts with its own terms (on an order acknowledgment, say), section 2-207 decides which terms become part of the deal; between merchants, added terms can become part of the contract unless they materially change it or you object.2 On large equipment orders, read the acknowledgment.
Keep POs, receiving records and invoices with your books. IRS Publication 583 lists invoices and receipts among the supporting documents to keep, and says records generally must be kept until the period of limitations for the return runs out, three years in most cases.3
How purchase orders work in TradesWork
Purchasing in TradesWork runs stock POs to refill a location and special-order POs for one job, from draft to submitted, received partially or in full, and closed. Receiving puts stock on hand and updates the moving average cost. Replenishment can draft POs grouped by vendor for anything below its minimum, and vendor returns track the credit from pending to received.
Job costing counts purchase orders received for a job at their received cost, de-duplicated against stock used and invoice lines, so a part is never counted twice. See also work order, the job record a PO is usually tied to.
Footnotes
-
UCC 2-201, Formal requirements; statute of frauds, Uniform Commercial Code, via Cornell Legal Information Institute. States adopt the UCC with their own variations. ↩
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UCC 2-207, Additional terms in acceptance or confirmation, Uniform Commercial Code, via Cornell Legal Information Institute. ↩
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Publication 583, Starting a Business and Keeping Records, Internal Revenue Service. ↩
