In a similar scenario, I told the agency in clear terms that I will be able to commit just 1000 words per day for its work. My daily capacity is 2000-2500 words per day. In that way I am sure to be able to cater to other clients as well.
I will also negotiate to get paid at regular intervals. Such a project is sure to have many files. I will be raising the bills as when a predetermined number of words is crossed. Payment has to be done within a tight timeframe, say after 10 working days. No payment, the commitment to daily 1000 words is no longer valid.
One thing you should not do is to agree to give any discount whatsoever in view of the large work. They are not doing any favor to you by giving such big work. They are doing themselves a favor by ensuring uninterrupted service in the form of 1000 words per day. Hence it will be in your interest not to give any discount, as otherwise there will be conflict of interest between this lower rate and the normal rate you get elsewhere.
My opinion- I wouldnt do it.
I've had two opportunities in the past, a while back, both were from other freelancers posing as an agency (lousy website) outsourcing their work for dirt cheap rates and a contract that I was fully responsible for just about everything including holding out for the 1 year contract! I couldnt back out or else I'd be responsible and would owe them the money that I'd otherwise make. I searched and found the resume of one of the outsourcers and according to their rates for that language pair and subject area, I'd get paid for doing the job .03USD per word and they (doing nothing) would get paid .07USD for every word I translated. Furthermore, I'd get paid according to what the outsourcer considered as the final say on word count, and any disagreement on their end.
It was an odd job too. One that I had to go through the different search engines, pick out news from a certain suject matter and translate 2000 words per day. (I had to search the stuff myself and then contact the outsourcer to see if it was proper to translate what I had picked).
I dont deal with garbage any more. I simply block-out the email address.