By theory, your comment is very believable however it is not always factual in all circumstances, ...and that 'word getting out' is often incorrect or unjustified.
IMO, the rebuilder I think you are describing basically sells his engines on price-point. He wants to be, or near the lowest price of his competitors. Being brutally honest with you, even though it appears he can produce a great product (-because he does have many out there), my shop cannot compete with him on pricing. Because of that, I do lose some jobs to his shop. The issue in most situations is, that potential customer for me was more interested in going the route of the lower price vs. paying for the extra steps to ensure a top-quality rebuild. It is only after there is a problem that the customer starts looking for others to place blame instead of admitting where they went wrong in their decision making. Maybe where they went wrong was choosing the cheaper option, -or maybe not asking enough questions, -or maybe not having a concise agreement on the scope of work, ...or several of those maybes.
While none of us will likely ever know the full extent of what happened with your friend's engine, -nor will we hear both sides to factually establish where the blame lies, I do think it is very fair to say that in many instances there are assumptions made in a business deal that were never part of the discussion. I have found that taking extra time to digitally document the condition of a component from many angles and writing the scope of requested work in exacting detail is the way to circumvent these misunderstandings. Even then, expectations and disagreements can be an issue.
I also think it is fair to share how I was recently involved with one of this shop's unhappy customers where the engine had a massive oil leak and a clutch chattering issue. I was contacted and asked if I would repair the problem. That shop's customer was frustrated because they had sent it back twice and it still had the same issue after being returned. I agreed however I suggested that he work thru it until there was no resolution. In defense of that shop, the owner stood behind it on the 3rd trip back. He corrected the issues and paid the transportation expenses for the customer. I think that says a lot about the shop owner's character in that he tried to do the right thing when mistakes were made. Rarely does this type of 'word on the street' get told, but I do think it does need to be shared more often. Unless you have the ability to walk on water, we all are going to have mishaps and malfunctions happen.