I'll raise them a little bit, as my rate is a little low for my experience level anyways, and I deserve a raise after over a year. Besides I'm not enjoying being there, being burned out and all. I could get more at Micro$oft.
However recognizing when you truly have them by the short and curlys is an important skill.
Noone is irreplaceable. But your replacment cost could be MUCH higher then your current billing rate. It could be shutting down their business for a period. If that is the case you should extort.
If this is your first contract position or you NEED the ref. Don't do it. My advice was based on the assumption that you have a reputation established and don't much care about the final outcome for a company as poorly managed as the one you discribe (which begs the question why have you stayed as long as you have?).
Remember you will get most of your future contracts through contacts with other technical people. The people you want to impress are the others in the trenches as they will scatter to the four courners of the world. Do a good job, don't make the jobs of others harder then needed. Managers often don't understand what you do, much less if you do it well.