Other than the fan clutch, that quote is on the more reasonable side of BMW quotes. The labor rate is about right, time is correct. The problem I see is that the shop is quoting a water pump and no other cooling system components. Typically with E46 if the water pump has failed, chances are the tank, hoses and t-stat are about toast too. This shop doesn't sound like a BMW specialty shop, and their labor rate backs that assumption.
My advice would be to take it to a good local Bimmer shop and get another diagnosis there. And to comment on something mentioned above, I do not recommend you try to bring your own parts. That's like bringing your own steak to a restaurant. Most shops will be insulted, just so you know.