If it were up to me, I'd be putting the contract in the "last chance" saloon - Alstom would be given 28 days to come up with an acceptable revised schedule and rectification plan for all of the faults, and demonstrate they had capability to deliver the plan. If Alstom were to fail to do so, then the best thing for SWR to do would be to instruct their legal team to begin proceedings to exit from the contract.
A word of warning would however be that Alstom are known to be incredibly difficult towards operators who dare stand up to them. After OBB cancelled their Talent 3 order, Alstom went trawling through every single other contract that OBB had signed with other companies looking for the slightest issue, and managed to get a court to void a seperate contract OBB had with Stadler (which Alstom had bid for and lost) over a technicality with a digital signiture, despite Alstom not having the slightest bit of an issue with using that exact same type of digital signitures with contracts awarded to them! The potential for Alstom to cause issues afterwards would definitely need to be considred by SWR, in particular with any contract with a different manufacturer for a different fleet of units, but also with the maintenance and refurbishment contracts Alstom have with the 458s - whilst Alstom would have no legal grounds to do so, they could easily start being difficult over the 458 contracts if SWR were to cancel the 701s.
Alstom do however need to make an urgent attempt to sort out their reputation. Already in addition to losing the Talent 3 order from OBB they've also almost certainly lost themselves an order for Hydrogen iLints that OBB were set to award thanks to the fallout, but I think Alstom have bigger issues to worry about. They're in the doghouse with SNCF after they tried walking away from a joint bid with CAF they'd inherited from Bombardier for Line B of the Paris RER as they had wanted their own independent bid to win instead (read that as Alstom were moaning about winning a contract because the "wrong" one of their bids was selected as the winner) - SNCF and RATP threatening legal action swiftly got Alstom to change course on that though, likely because Alstom know that without SNCF orders they'd go bust. They're also in a situation where they may have NS walking away from their order for 99 EMUs (as NS did with the V250 order from Ansaldo for the same issues), which as per OBB's (now cancelled) Talent 3s and SWR's Aventras are running in excess of 18 months late because of software and build quality issues, and unlike the Talent 3 and Aventra issues Alstom can't blame Bombardier for that one! Losing the OBB order cost Alstom 46 firm orders (and an additional 254 options) - losing NS and SWR would bring their total of lost orders for software and build quality issues up to 235 firm orders and 254 options lost, not an insignificant amount of money to lose and it would force Alstom to get their act together if they wanted to survive as a business.
I’m no expert in contract law but cancelling would be a lengthy and perhaps expensive process? Also tantamount to crapping on Alstom would make the support needed for soldiering on with Class 458s very difficult seeing as they supply many of the spares and overhaul them at Widnes or their sites in France.
It's certainly not an easy process, as OBB discovered earlier this year! Not sure about lengthy though, OBB managed to get out of the Talent 3 contract within a few months of announcing they intended to do so.
Alstom wouldn't have any legal grounds to be difficult with SWR over the 458s if the 701 order were to be cancelled as they're completely seperate, unrelated contracts. If Alstom were to start being difficult with the 458s as a result SWR would be able to take them to court. That said, as mentioned above Alstom do have a track record of being incredibly difficult towards companies that dare to take legal action against them, so it's a valid concern.