+1, returning the refund was the right thing to do if you're going to keep the parts. However, I don't think it was fair that you had to wait so long.
I had a somewhat similar situation with a repairman and a Les Paul with a broken headstock. I took the Les Paul into a local shop, who said that they didn't do this sort of work in-house, but they have a guy who does it. I paid a deposit and they said they'd call me in 2 weeks with an estimate. After repeated attempts to find out what the situation was, I never did get a straight answer... Fast forward 2 years, still don't have my Les Paul back. I'm in another, different local shop (call it Shop B) in my town and mention "the case of the missing Les Paul" to the shop owner, who reluctantly tells me that he, in fact, was the one the first store hired to repair my instrument. He said that he was cleaning the instrument up and accidentally spilled a corrosive chemical on the finish, ruining it, and was frankly embarrassed about it, so he never told the Shop A what happened and never fixed the headstock, either. He just put the guitar back in its case and tucked it away in his shop, hoping the owner would forget about it.
Well, I wasn't too thrilled, and the guy seemed truly sorry and offered to do the headstock repair for free. It was a pretty bad break—this would have been the second time it had been repaired, and would probably cost me $300-400, so we agreed that he would do the repair for free in exchange for taking 2 years too long.
Fast forward nine months, I still had not received my guitar, and he kept giving me B.S. excuses—he was moving and didn't have time to get to it, he was swamped with other (paying) repairs, he was going out of town to a NAMM show, etc. Finally, I told him, just give it back, and I'll take it somewhere else. He sweet-talked me into giving him another chance, saying that if I took it somewhere else, I would have to pay for the repair, and this way I would be getting it "for free." I told him if he wasn't actually going to do the repair, it doesn't matter whether it's free or not, but I would give him another chance.
After three MORE months (3 years total now), I went back to Shop A and told them that I knew Shop B had my guitar, knew the story about the finish damage, showed them my 3-year-old receipt from dropping it off (including serial number, proof of my deposit, and proof that they gave me a 2-week time frame for calling with the estimate). I told them I wanted my guitar back and it was their responsibility to go get it from Shop B, since they outsourced it to him.
The manager of Shop A called me the next day and said he had my guitar and I could come get it anytime. I told him that I wanted him to ship the guitar to Gibson and get an estimate for repairing the damage to the finish, since technically, his shop (Shop A) was responsible for that. The manager told me that they're not a Gibson dealer, but I, as the owner, could contact their repair department about that. So, I picked up the guitar, packed it up, emailed Gibson in Nashville and sent it off (total cost to me: $175, including Gibson's fee for a repair estimate). I had my lawyer write a letter to Shop A first to make sure they were going to cover these costs, and after some wrangling and two more months, got them to agree.
Gibson called me to say it would cost $1850 to fix the finish (the color had been discontinued, so it would have to go through their custom shop). They also said it would cost $1800 on top of that to repair the headstock. I told them to go ahead and ship the guitar back to me and I would consider it totaled, since $3,650 > the cost of even a brand new one.
Shop A's lawyer wrote to my lawyer and said that in Shop A's expert opinion, the guitar was only worth about $500, considering that I brought it in with a broken headstock, and that they would be willing to reimburse me the $170 in shipping both ways (to & from Gibson) and the $75 evaluation fee from Gibson.
After several letters back and forth, it was pretty clear that they were unwilling to pay a single cent for the fact that I had to wait 3 years and 4 months for my guitar and that when I got it back, it was still not repaired, even though the owner of Shop B agreed to repair it for free in exchange for taking so long.
As I'd already paid the $245 in shipping and fees to Gibson, plus another $250 to my attorney for writing letters, I agreed to settle for their offer of $745. The settlement included a signed agreement from me saying I would not take any legal action against either Shop A or Shop B in connection with this incident, so that pretty well seals the deal.
At the end of the day, I have my Les Paul back after 3 years and 4 months, with the finish corroded from this chemical, and with a still-broken headstock, and I also have $250 left from the settlement—not even enough to get the headstock repaired by another shop, let alone the finish.
There's really nothing I can do... These things happen. I still have a credit at Shop A from my original deposit, but I really don't even want to talk to them again. I mostly shop in St Louis now.