There seems to be only two good options:
1. Take a hard look at what this vendor is doing and work with them to identify changes in scope or resources that might keep the project on track.
2. Upon not succeeding with 1), take what you have learned and a new go forward plan to the sponsor for additional advice or consideration.
You are now basically negotiating between the vendor and sponsor.
Whatever you decide, be sure to document the lessons learned:
- if you are going to use this vendor again, you need to take a look at the procurement contract in place and make sure it spells out terms for late delivery and non-performance
- start a search for a new vendor or see if their knowledge can be developed in house