Blanket Contracts: Everything You Need to Know
Blanket contracts, also called blanket orders, standing orders, open orders, or blanket purchase orders (BPOs), represent an agreement between a buyer and seller to purchase goods or services from a specific vendor.4 min read
Blanket contracts, also called blanket orders, standing orders, open orders, or blanket purchase orders (BPOs), represent an agreement between a buyer and seller to purchase goods or services from a specific vendor. Usually developed by a business' purchasing department, blanket contracts are different from regular purchase orders in that they establish an ongoing relationship between a business and its supplier and set time and dollar limits. To make a purchase when you're using a blanket contract, you issue a release against it.
When Should I Use a Blanket Contract?
TAPN advisory consultant Tom Nichols points out that blanket purchase orders are usually in effect for 12 months at a time before they are renegotiated. Maintenance or service agreements are a good example of this type of contract. Often you see this type of document used between universities and their suppliers for short-term contracts.
Documentation related to purchasing decisions must be thorough and well-researched, so purchasing supplies with one of these contracts in place can be a lengthy and complex process. However, blanket contracts can be used as a shortcut in certain circumstances. For example, if you are going to buy the same product from the same vendor repeatedly over time, a BPO can streamline your business, especially for inexpensive goods that you use up quickly.
A blanket order can also be used in association with a contract that's already in place or with a new agreement once negotiations are complete. Such a document is often used with a purchasing card or a ghost account when it involves purchasing many small, inexpensive items from a single vendor.
Blanket contracts are used most effectively when the buyer:
- purchases the same item or service repeatedly from the same vendor.
- makes payment in the same way over the term of the contract, which is usually one year.
- orders the same materials sent in multiple shipments.
- gets better pricing by purchasing in volume.
When Should I Avoid Using a Blanket Contract?
BPOs are not a good idea if:
- The goal is to establish an open line of credit.
- Prices are not known or fixed.
- Quality is questionable.
The Benefits of Blanket Orders
Blanket orders are helpful to sellers and purchasers alike. Suppliers appreciate the opportunity to establish repeat customers. They know that buyers are less likely to explore other sources if a standing contract is already in place.
Buyers enjoy this method of purchasing because it involves less paperwork and time to buy from an already-approved vendor. The customer knows how much they will pay each time, which helps control expenses. They also know what quality to expect from the product or service, and having a BPO in place can help resolve any disputes that may arise.
However, the buyer is still free to shop around for other items since the open order specifies the item to be purchased and the quantity. For example, a company that leases computer monitors could set the price of the devices for the coming year. Since the agreement only applies to monitors, the buyer can still shop around for the best price on other computer components and establish another open order for that.
What Should a BPO Include?
A BPO should include:
- the length of the agreement, usually one year.
- cancellation terms.
- the number of the previous agreement if this is a replacement.
- items covered.
- the maximum quantity.
- payment arrangements.
- information required by the DEA if regulated or controlled substances are involved.
Risks of Using Blanket Purchase Orders
Blanket purchase orders have benefits, but they also carry the risk of being compromised if mistakes are made. According to Nichols, regular maintenance is critical, since the most common error is a failure to monitor the agreement. If the contract expires or the dollar limit is reached, the terms revert to the standard. To avoid this, Nichols recommends that accounts payable keep copies of all BPOs.
Blanket Contracts Versus Volume Purchasing
Blanket contracts are different from volume purchasing documents. While both types of contracts govern ongoing purchases, volume agreements set a quantity of goods or services that must be purchased or the buyer faces a penalty.
Even when blank orders include a maximum budget, it's still not a strict limitation. Buyers can purchase up to the limit set in the contract, but they are not required to buy anything at all. The agreement simply lays out the parameters of the relationship between the parties. In order to make a purchase, the buyer contacts the seller to initiate the order during the term of the agreement.
If you need help drafting or interpreting a blanket contract, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.