Purchase orders, supply agreements and Incoterms

Not everything a contractor buys is a subcontract. Ready-mix concrete, reinforcing steel, lumber, hardware, rented equipment and owner-specified equipment are usually bought on purchase orders or supply agreements. The difference matters: a supplier that only delivers goods is selling them, and the law of sale of goods applies; a firm that comes on site to install or perform work is a subcontractor and needs a subcontract, insurance and safety orientation. This lesson covers how to write purchase orders that protect the project, how to read suppliers' terms, and how delivery terms, including the international Incoterms rules, decide who pays for shipping and who carries the risk when goods are lost or damaged in transit.

Purchase order or subcontract?

The distinction also matters for payment and liens. In most jurisdictions, material suppliers to a project have lien or payment-bond rights for unpaid materials, so a supplier to a subcontractor who is not paid can claim against the project even though it never had a contract with the general contractor or the owner (CON-220).

What a purchase order should contain

A purchase order is a contract. A one-line order ('supply rebar for Larch Street, $865,500') leaves almost every important question to the supplier's standard terms. A good purchase order states the following.

The battle of the forms

Contractors send purchase orders with their terms on the back; suppliers reply with order acknowledgments or invoices carrying their own terms, which often limit warranties, exclude consequential damages and make delivery dates estimates only. When the two sets conflict and goods are shipped anyway, which terms govern?

In the US, sales of goods are governed by Article 2 of the Uniform Commercial Code, adopted in every state except Louisiana (which adopted most of it). Under UCC section 2-207, an acknowledgment with additional or different terms can still form a contract, and between merchants the additional terms may become part of it unless they materially alter it or the offer expressly limits acceptance to its own terms. Conflicting terms are often knocked out and replaced by UCC default rules. The practical defense is to have the supplier sign the purchase order, state in the order that acceptance is limited to its terms, or negotiate a supply agreement that overrides both forms.

Default rules on warranties also matter. Sale of goods law implies warranties that goods are of merchantable quality and fit for a known purpose, but suppliers routinely try to exclude them. A contractor that needs a warranty matching the prime contract must write it into the order and make sure the supplier accepts it.

Delivery terms and the risk of loss

Two questions arise for any shipment: who arranges and pays for transport, and who carries the risk if the goods are lost or damaged on the way. For domestic deliveries, construction purchase orders usually say 'delivered to site' or 'FOB jobsite', meaning the supplier arranges and pays freight and carries the risk until the goods arrive; 'FOB factory' or 'FOB shipping point' means the buyer pays freight and carries the risk from the moment the goods leave the supplier.

In the US, the UCC gives domestic FOB terms specific default meanings (FOB place of shipment versus FOB place of destination), which differ from the Incoterms FOB rule used for sea freight. Purchase orders should say in words where delivery occurs and who pays freight, and use Incoterms for imports.

For international purchases, the International Chamber of Commerce's Incoterms rules are the common language. The current version is Incoterms 2020, which has 11 rules. Each three-letter rule allocates the tasks, costs and risks of delivery between seller and buyer, but does not deal with when title passes or with payment; those still need to be in the contract.

A common misunderstanding concerns CIF and the other 'C' rules. The seller pays for carriage to the destination port, but the risk passes to the buyer when the goods are loaded at the port of shipment. If a container of curtain wall panels is lost at sea under CIF, the buyer carries the loss and must claim on the insurance the seller bought (which, under CIF, need only be minimum cover).

Landed cost

To compare a domestic quote with an imported one, the buyer must calculate the landed cost: the total cost of getting the goods to site, including everything the quote does not include under its Incoterm.

# Landed cost of imported versus domestic glass units for Larch Street (illustrative)
domestic_delivered = 640_000                 # quote delivered to site, duties not applicable
imported_fob = 455_000                       # quote FOB port of shipment
ocean_freight = 38_000
marine_insurance = 0.004 * imported_fob
duty_rate = 0.0                              # depends on tariff classification and origin
customs_broker = 3_500
port_and_drayage = 14_500                    # port charges and trucking to site
extra_float_cost = 22_000                    # carrying a 4-week longer lead time
duty = duty_rate * imported_fob
landed = (imported_fob + ocean_freight + marine_insurance + duty
          + customs_broker + port_and_drayage + extra_float_cost)
print(f"Imported landed cost:  {landed:>10,.0f}")
print(f"Domestic delivered:    {domestic_delivered:>10,.0f}")
print(f"Difference:            {domestic_delivered - landed:>+10,.0f}")
for d in (0.10, 0.25):
    print(f"If duty or tariff of {d:.0%} applied: landed {landed + d * imported_fob:,.0f}")

Imported landed cost:     534,820
Domestic delivered:       640,000
Difference:              +105,180
If duty or tariff of 10% applied: landed 580,320
If duty or tariff of 25% applied: landed 648,570

On these numbers the imported glass is about $105,000 cheaper landed, before any duty. But the comparison is sensitive: a tariff of 25 % on the FOB value would erase the saving entirely. Tariffs on some building materials changed several times during 2025 and 2026 (Lesson 8), and domestic content rules on public projects can rule out imports altogether (Lesson 10). The buyer should also consider the longer lead time, the difficulty of replacing damaged units from overseas, and the currency risk if the price is in another currency.

Payment terms, discounts and stored materials

Supplier terms such as '2/10 net 30' offer a 2 % discount for paying within 10 days instead of 30. That is an expensive form of credit to decline: giving up 2 % to keep the money for 20 extra days is equivalent to a high annual interest rate.

d, net, disc = 0.02, 30, 10
annual = d / (1 - d) * 365 / (net - disc)
print(f"Forgoing 2/10 net 30 costs about {annual:.1%} a year")
invoice = 884_000                     # ready-mix concrete over the podium pours
print(f"Discount available on the ready-mix purchase order: {d * invoice:,.0f}")

Forgoing 2/10 net 30 costs about 37.2% a year
Discount available on the ready-mix purchase order: 17,680

Taking supplier discounts is usually worth it when the contractor has cash or a credit line costing less than about 37 % a year, which is almost always. But the contractor's cash conversion cycle (CON-320) may make early payment difficult when it is itself paid 30 to 60 days after billing.

Owners sometimes pay for materials delivered but not yet installed, and sometimes for materials stored off site or still at the fabricator. Before paying a supplier or subcontractor for stored materials, the contractor should confirm that title will pass, that the materials are identified for the project and insured, and that the owner's contract allows payment for them. A bill of sale, photographs, an insurance certificate and, for off-site storage, an inspection or a bonded warehouse are common requirements.