Church directories make up about 30% of my business so I will make some comments about this subject.
A little background for those who have never dones these or have not done one recently.
A church directory is a pictorial directory of the congregation. These are similar to a yearbook in that they have activity, family photo, roster and usually blank pages at the back for new members. There are three HUGE companies in the business nationwide. They are Lifetouch, PCA International, and Olan Mills. They all offer the same basic product-The church will receive a free directory for access to sell to their members. The church get's a free directory, an up to date member database, and they also use them to help reconnect members that might not be that active in the church
Each family group photographed, whether that be 1 person or 13 (I did a 15 person shot last December), will receive a free 8x10 of their chosen directory pose. The church usually dedicates a coordinator who will set the photography schedules, design the activity pages, and approve the final proof. The big three generally run though 25-30 families a day. That means a 100 family church would take about 3 or 4 days to photograph. 30 families a day is basically a family every 15 minutes. Their up front costs for printing the directories and free 8"x10" is somewhere around 15-20 per person. When you factor in taxes, etc they need to clear around $45.00 per family photographed to make any sort of profit. It's a HUGE business.
Now that there is some background for what you have for a church directory, I want to get into the lighting issues associated with producing one. 30 families a day requires that you use a fixed lighting/camera setup. You have to make sure all of the head sizes are about the same proportions or similar for the directory photographs. You also have to make sure that the lighting is consistent throughout the entire shoot. The advantage to a fixed lighting/camera setup is this consistency. Unfortunately, it is also has two huge disadvantages. People are not all the same skin tones, so if you have someone with very fair skin then the fixed lighting might come out too bright. The second disadvantage is when trying to shoot children. It much easier to pick a camera up off a tripod that move the trip to their levels. Most of the big companies are still shooting 46MM Long roll film inside of a camera that looks like a missile targeting system
I think what happened to the OP is that either they were not using fixed camera setup and had a flash too close on a moving camera or maybe they are fairer skinned. E
Whew! That all being said. Every reputable church directory company always lightly retouches the photographs. They go through a proof process where any glass glare is removed, skin wrinkles are lightly softened, and mild dodging and burning. This should have taken care of the highlights The OP saying the company wanted to charge to fix their screw-up is a reflection on how that company operates. Which gives smaller companies like mine a bag reputation.
There are alot of shysters in this business which make it difficult for us little guys to compete.
Also, you have to remember these are not private portrait sessions. These are basically event photos so you are not going to get the same creativity that could get focusing on one client for two hours.
I happen to do my directory business with a digital workflow, but it all the same principles. The only thing I do differently is that I only do 13 or families a day because I have found the time very productive in producing more creative photographs that happen to sell very well..
My two cents.