You don't have to negotiate fees - if you reducing the requirements by the appropriate cost, you aren't haggling over the rate. And while I know the kind of customer you mean, a price sensitive customer isn't necessarily one who won't pay on time. I have a non-profit customer who is very price sensitive, but is one of my most reliable in terms of on-time payment.
If you are set on turning down the work, you can say that you have a minimum project size for first time customers. This isn't uncommon - a lot of people aren't interested in taking on tiny projects from new customers. You have a certain target client/project you are interested in, and changing the requirements won't fit that anymore.
Or you can tell them that quality is very important to you, and you don't recommend that they try to complete the project by cutting some of the requirements. You couldn't in good conscience work on that type of project, and if that is the direction they are going, you will not be a good resource for them. That's not impolite - that's true.
If you are set on turning down the work, you can say that you have a minimum project size for first time customers. This isn't uncommon - a lot of people aren't interested in taking on tiny projects from new customers. You have a certain target client/project you are interested in, and changing the requirements won't fit that anymore.
Or you can tell them that quality is very important to you, and you don't recommend that they try to complete the project by cutting some of the requirements. You couldn't in good conscience work on that type of project, and if that is the direction they are going, you will not be a good resource for them. That's not impolite - that's true.