We have an existing government contract, can they change the terms mid-way?

Whether they can do this depends on the contract's variation clause. In general, a contract cannot be varied without the agreement of both parties unless the contract gives one party the power to do so, such as a right to vary the scope on notice. Read the variation and change control clauses carefully, and check whether any right to vary is limited, for example to changes within the general scope or subject to a fair adjustment of price. A unilateral change that is outside the contract may be a breach. Under the Government Procurement Rules, significant variations may need to be justified and documented, and, if large, may require a fresh procurement. Respond in writing, reserve your rights and negotiate a fair variation, or seek legal advice before continuing under the changed terms.