I realize you have already come to an agreement with the owner over costs, and he said he would be fine with it, to put it bluntly, I think it’s a mistake. Deep down does he really feel that way, or, worse yet, change his mind after his neigbor/brother-inlaw/ coworker/etc. talks to him and convinces him otherwise. I would have a talk with him and explain the amount of work you put into it to get to this point, but as a valued customer you would prefer to absorb costs up to this point. He may offer to still pay you something, if so fine. In doing so would be a great customer retention opportunity, plus attract new with word of mouth from him.
Second, as others have said, without trying to second guess the diagnosis, it doesn’t add up for me either. I too would be concerned that after engine replacement the problem was still there.