There is, I suspect, a surprisily large amount of naivety being shown here. Not in the specifics of the the MFTS issue itself but in the concept of how contracts work in general. I have seen from both side of the fence how poorly contracts are tendered/met. The MOD in general has a terrible habit of writing the contract first and then later putting the effort in to what the actual real requirement is. Thus, the contractor bids low to meet the entirely optimistic requirement knowing they will not be held to it because in fact the task they have been asked to meet is probably only 50% of the true need and so even if they hit all their targets, or not, the contract is doomed to fail. In that instance would you go all out, spend all of the company resource and still fail to hit anyone's idea of the quality required or would you draw in to a defensive position and point out that the contract is being met and the company stays afloat. Anyone who says the former has no idea how commercial interest works (and probably works for DE&S commercial). The mission creep, poorly defined requirements and constant push for in-year savings destroys programmes from the bottom line up.
In this instance, did the company over promise - probably. Could the MOD recognise this and see through the bid - undeniably it could and arguably it did. Did the MOD award the contract anyway - history shows yes. Reap what you sow/get what you pay for/if it seems to good to be true....pick your trite phrase as they all apply.