Yes and no.

They are not always tight but they can be sealed when the old unit is taken out.

Going drywall to drywall will net you a bit smaller window as well as compared to a drywall cut back (if applicable or an option).

Everything else sound okay.

The sheet rock would have to be fastened directly to the 2x4 wouldnt it?
I cant see how there can possibly be a space with sheetrock.

The sheetrock if fastened to the 2x4s but also fastened to the window. When they pull out the window, they can seal that small gap (sheetrock to stud) with a mild sealant and/or foam if the gap is larger.

We cut back the jambs to put in a larger window, if the outside measurement allows us to do so, in order to mitigate glass loss.

It is typically easier to get a foam gun nozzle in from the outside to foam and air seal if the window is done ID the drywall return.
The real point is that you talk with your installer and let them know you want an air tight install and then listen to their methods.

theWindowNerd...