ITNet chief executive Bridget Blow revealed the write-off when she announced interim results last week. The decision to terminate the contract was made "without good cause", she said.
Blow reiterated the company's determination to seek redress. "The board will take all necessary steps to recover compensation for the loss of the Cabinet Office contract, and is confident of a positive outcome," she said.
The Cabinet Office issued an unusually tough statement when the contract was terminated, saying it took action "to avoid non-delivery of this IT project and to prevent unacceptable and unplanned over-expenditure against contractually agreed costs".
The datacentre contract was ITNet's first service provider deal with central government, according to analyst firm Ovum. The outsourcer was the only supplier at the end of the bidding process following withdrawal by Fujitsu Services and SchlumbergerSema.
Problems with central government have not held back ITNet's local authority deals. With IBM it has been named preferred supplier for an outsourcing contract at Bradford City Council and it has won a £13m contract extension with Enfield Council. It has also been shortlisted for a £100m contract at Swansea Council, where staff have been on strike against outsourcing for four weeks.
ITNet has also won a £4.7m two-year extension to its desktop and datacentre hosting contract with Cadbury Schweppes. ITNet will continue to host and support Cadbury's Unix and NT platforms, and will provide print and disaster recovery services until the end of 2006.
Under the deal ITNet will deliver a 10% saving on the cost of supporting Cadbury's mid-range servers and will cut the cost of mainframe and disaster recovery services for Cadbury's legacy systems by 5%.