Purchase Orders - Are they Appropriate


Should we use a purchase order to contract for engineering and system integration services?

The following article was published by the National Society of Professional Engineers and was written By Paul L. Genecki of Victor O. Schinnerer & Company, Inc., one of the leading underwriters for professional liability insurance. This is a very important subject to all of us.  It’s equally important for the client as well as the systems integrator or engineering firm.

There are many issues and shortfalls that surround the use of purchase orders for the procurement of professional services. The likelihood of a successful project and relationship between a client and its engineer is highly dependent upon the clear definition of each party's roles and responsibilities, the quality of the services being provided by the engineer, the level of communication that exists, and mutually understood expectations. The use of a standard form of professional service agreement addresses these issues and provides protection for both the client and the engineer that a typical purchase order is incapable of addressing.

Typical purchase order terms and conditions are written based upon the Uniform Commercial Code (UCC), which is a code developed to govern commercial transactions such as sales and leasing of goods, transfer of funds, commercial papers, bank deposits and collections, letters of credit, bulk transfers, warehouse receipts, bills of lading, investment securities, and secured transactions. This code is not intended for, nor is it suitable to govern, the rendering of professional services (which are not classified as goods or products) such as engineering, architectural, legal, accounting, or medical services.

All forms of professional service agreements should clearly express the intent of each party. Client-generated contract forms should include an acceptable standard of care for the professional, equity in the delegation of duties between the parties, appropriate authority and risk assignment, a clearly defined scope of services, and language that is unambiguous and unequivocal.

Purchase orders seldom identify the scope of professional services in a thorough and meaningful way. As previously stated, most purchase orders are intended for product procurement rather than professional services and include product liability, indemnification, and express warranty provisions that are inappropriate for professional services. These terms go well beyond what the law requires of providers of professional services. Professional services are governed by tort law and the prevailing professional standard of care in place at the location and time frame that the services are performed.

Providing services under purchase order arrangements with UCC type terms is not appropriate to the relationship that needs to exist between a client and its engineer nor is it consistent with common law. Most clients are driven to use a purchase order for tracking and payment purposes, the purchase order number being a way to track expenditures in corporate accounting records. If the intent is to have a purchase order to track expenditures, the purchase order should be used for the payment system while terms and condition that reflect the realities of design practice and the normal legal liability of engineers should be substituted for the UCC language typically preprinted on the back of the purchase order. A purchase order can simply reference the terms and conditions of a professional services agreement that has been mutually agreed to by the engineer and the client in place of the preprinted terms on the purchase order. This would replace the inappropriate product liability and warranty language written in most purchase orders.

It is appropriate, and indeed prudent, to make reference to the terms and conditions of a professional services agreement or to standard terms and conditions from a letter agreement or proposal negotiated between the engineer and the client that will supersede the product liability, indemnification, and warranty language that most purchase orders contain.

The Engineers Joint Contract Documents Committee (EJCDC) offers a variety of widely accepted standard contract forms that correspond to most modes of project delivery and varying levels of service. These documents have been accepted and are being used by governmental agencies as well as commercial and private parties. Engineers are familiar with these forms and are willing to educate clients on the rationale and benefits to both parties reflected in the specific provisions of standard forms of agreement.

In many cases, consensus forms of agreement provide significant benefits to the client that the client may overlook or simply not understand. Incorporating by reference such provisions can allow the engineer to better serve the client without entrapping the engineer is a system of liability—without proof of negligence—which is both unfair and not covered by most liability insurance policies. If a project includes construction, standard Owner/Contractor EJCDC Agreement forms and General Conditions are available and designed to integrate with the Owner/Engineer Agreement and clearly define the roles and responsibilities of each party (owner, engineer, and contractor).

A detailed written agreement between the engineer and the client can prevent confusion, uncertainty, and dissatisfaction. The agreement establishes the scope of services, the overall relationship, the system of communication, the standard of care and the rights and responsibilities of both parties. The likelihood of misunderstandings, disputes, and litigation increases significantly if the contract does not clearly represent the intent and agreement of the parties.

Using standard professional service contractual forms (rather than a purchase order/UCC terms) will significantly increase the likelihood of a successful and rewarding relationship with your engineer and a project result that will meet your expectations.

Paul Genecki is a professional liability consultant to Victor O. Schinnerer & Company, Inc.