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Can't see the contract, so this may be answered in the details there.
I'd second the 'cancel and take more time' option. You do not want to just seal up dry-rotted wood underneath nice pretty looking cladding - it is great looking, but then your house will have some real problems. Since that repair is fairly complex, I'd be suspicious of anybody who wrote a bid that did not specify pretty clearly what they were replacing, or had a per-unit price (i.e. any rot is repaired at a cost of x$ per window, etc). 'Flat rate and we fix whatever we find' sounds like an incentive to overlook replacing stuff, and once it is covered over, you won't know until the trouble starts. FWIW, if you want to check yourself: if you can push a nail or pin into the wood more than about 1/4" by hand, it is dry-rotted. This will only get at the surface, and there is more underneath, but if the sills are rotted, likely some of the subframe is too. May want to ask some neighbors (with nice windows) who did theirs and if they were happy.
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