OT - what to do when a client sets a financial cap long after you took the job

[Technomage-hawke]

I'm in a bit of a quandary here guys and I need a little advice.

A friend of mine back in Missouri took a computer forensics gig this last week 
and was running the software required to analyze the drive in question. the 
Public defenders office in this case didn't say anything else until today 
(fully a week after he had started work).

today, they informed him that there would be a $1,000 cap on any work done. 
However, he has altready done over $4,800 in work.

He asked me what I would do in this case (since thats not my line of work 
presently, I was unsure how to proceed):
1. require the pay the entire sum (and possibly give up any future contracts 
from the P.D.'s Office)
2. take a hit on his business (tax loss - not recommended by him anyway)
3. eat the remaining and take the $1,000

some help would be greatly appreciated.

BTW, in a way this is linux related as the software he is using (FTK) is 
running under vmware on a linux platform.

anyway, some helpful (and time sensitive) advice is needed here.