Good morning. I am Loren, a licensed attorney, and I look forward to assisting you. I am sorry to hear of your dilemma. I realize how frustrating this is for you and I hope to provide you information which is accurate and useful, even though it may not be the news you were hoping to get.
As a practical, you are entitled to compensation and, if the contract allows, a setoff on the final payment.
However, you can pretty much count on the installer filing a lien on the property if they are not paid and, as the cost of the pipe and its installation are fairly minor, your right to withhold $750 is probably pretty shaky, from an equity standpoint.
I would pay the contract, have the water line repaired and then sue the contractor in small claims court. Small claims court is designed to be "user friendly" so that you can present a claim without an attorney. Also, it moves much more quickly than regular court. You can get the necessary forms to start from the clerk of the court.
Defending the lien will be more costly and time consuming.