Small companies may be reluctant to take action for fear of losing work - Unease over late payment penalty

The new Government's plans to penalise late payment throughout the business community as a whole has caused unease within the construction industry.

Jennie Price, Chief Executive of the Major Contractors Group, commented: "We are not sure that a statutory right to interest will actually change the late payment culture. Everyone agrees that the late payment culture should go, but people may just increase their payment periods and that would adversely affect us as much as anybody else," said Price.

The issue of late payment has bedevilled the industry for years. Sir Michael Latham's recommendations to combat the practice were left out of last year's Construction Bill. The Labour Government has now put the issue firmly back on the agenda by commiting itself to legislating for a statutory right to claim interest on late payments.

A Green Paper will outline plans for late payment legislation allowing small firms to claim interest on invoices that have not been paid after the required date. Large firms will also be required to detail how many of their bills were paid late in their annual reports.

"We think that more effective credit management and more efficient court procedures to collect debt would be more effective methods of ending the late payment culture. You also have to remember that the construction industry is different to the rest of the business community in that the new Construction Bill will introduce a major new era," added Price.

Michael Chambers, Director of Policy at the the Royal Institution of Chartered Surveyors warned that introducing a statutory right to interest on late payment could backfire. Chambers believes that although the move is intended to help small firms it could work to their disadvantage because small firms may be reluctant to take action against large firms on which they depend for future work.

The RICS also feels that the date set after which interest becomes due is likely to become the norm for payment. Paradoxically, this could delay payment times. Chambers concluded: "Drafting this legislation will be fiendishly difficult. It is vital that there is widespread consultation before it is introduced."