What your contractor is doing is normal. the caulk is the sealant, not the aluminum. Most experienced guys wouldnt cut.

I have seen it done both ways, what is normal could be by region or personal opinion. IMO there is one way that looks better and would have a more reliable caulk joint . I would be sure ro fur out the casing and sill and preferably a brickmold bend in the aluminum. I have seen many aluminum jobs mess up the looks of a good window install.

This is a common situation, ask your potential contractor to show you some pictures of work they've done in the proposed method.

I'd prefer to cut a kerf/seam to tuck the metal into, but that isn't the only way it can be done. The vertical seams aren't nearly as important as the top (tucking underneath your drip cap). Some guys will bend a small "out and back" return at the seam to make a surface to caulk to, alleviating the need for cutting or building out the trim. What you generally don't want to end up with is a seam where both sections are on the same plane depth-wise, that will make for sloppy caulking.

I do agree with todd that the ideal way is to build out the brickmold, then cap and return into a cut seam. Preferably with a brickmold bend in the metal.

Now is the time to remedy a poor situation or punt down the road. I'd do one of two things. 1) Build the trim and sill out before wrapping, or 2) don't bother with the wrap and fix it later.

Stephen, I apologize. I didnt realize your trim wasnt “proud” of the siding. Since it isnt, a cut would be preferable or as the others alluded to, you can build out the existing trim and then cap.