The PM owns the schedule, and evaluates all events through impact on schedule, cost, and quality. (events include both issues such as this and risks - if you suspect that the contractor won't complete on schedule. The process is the same.)
If there is an event that affects the schedule, then the PM should prepare a revised schedule with the best estimate and inform the relevant stakeholders of the change.
Your job is:
1. Get a revised estimate for task completion and adjust the schedule based on that estimate - ensure that you propagate the change forward through the critical path. I would work with the person in your company who "owns" the contract - the Contracting Officer's Representative in my field, but your company may structure things differently to get that revised estimate. That ensures that any relevant contract penalties and/or legal action for noncompliance/nonperformance are applied and that the COR is aware of the potential need to write contract penalties into the future contracts.
Examine the project schedule for opportunities to re-sequence other activities to minimize the effect on the ultimate finish date. Based on the information you provide, I think there will be no such opportunities, but this is one of those things that should be done even if it is fruitless.
What impact will this have on the projects cost? Will you have to keep teams on the bench while waiting for your contractor?
Document the lesson learned so that you can include this in future project plans. You indicate that these contractors are a regular part of your process; the next time you execute a similar project, you'll want to document this issue so that you can adjust the estimated variance, and potentially adjust the contract. (This is issue/risk management as well as lessons learned).
Brief the project sponsor and any other relevant stakeholders - your communications plan should indicates which stakeholders are interested in information on schedule delays/variance. They may choose to take legal action, they may choose to cancel the project, they may choose to accept the fact that this contractor has them over a barrel. The key is that you own the project and your responsibility is to inform them of the impact of the event on the project.