It sounds like you have seen pretty good improvement. He is eating better, sleeping better and doesn't need to be held all the time. That is huge improvement. Unfortunately this family is choosing to raise their child in a manner that makes him further behind socially and therefore he has leaps and bounds to make to transition into group care. BUT progress is progress no matter how small...and while it will take longer for this child/family it sounds like it is going to happen.
This families choice in parenting style sounds pretty common now a days. We have moved into a generation of parents where they feel they need to be a best friend. They need to let their child make all the choices and they need to avoid saying 'no' and setting firm limits. It does suck for the child...and it will suck for the families when these children are teenagers. BUT...it is quite common now a days. I would think there is a good chance the next family, should you terminate, would be similar and you'd be starting all over again.
Hold strong. He comes from a family where he gets what he wants (meals etc) so he is sitting there thinking what the heck lady I made it clear I want what I want. He'll soon figure out that your house has different rules and he'll come to accept them. It's just a whole lot of work for you...and a whole lot of stress for the child when home could have been doing things a bit differently to have a smoother transition into daycare, and later school and the workforce.
My MIL is the head boss in a major corporation. She is going nuts with the current generation of new employees. She has one 20ish year old working for this company that noted, very clearly that she is used to getting stickers when she does a good job and that she would work better if my MIL gave her stickers to acknowledge her work. Yep...this 'adult' has not only asked but is receiving stickers on a sticker chart at work. These are the people that are now having children. Can you imagine what their children will be like as adults???

































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