I REALLY don't like doing things twice ...
This might indicate it is not a DIY project for you. However, if you are willing to do a few bits and pieces twice, you might be able to master the work well enough for a permanent result.
I also hate paying 3-4x more for someone else to do it.
This is often the best motivator, and hopefully provides some perspective. If you end up spending 20% more than a perfectly executed DIY, you are still way ahead.
1, should I do it (hardy) or the cedar
Dunno without seeing it. My house is brick on one face (the north side, oddly) and cedar shingles on the other sides. As long as the finished product looks like it is supposed to be that way, it should be fine. Have you thought about planting shade trees on the south side?
As far as redoing the siding's cladding/sheathing, you probably won't know until after tearing off the siding. It could be that part was well done. I don't think it needs exterior rating because it should be well protected and never in contact with moisture. 1/2 inch plywood or chipboard is standard, but thicker won't hurt and will help a bit with sound insulation and overall durability.
As far as house wrap, brace yourself: it is surprisingly expensive (maybe $100 for one side). If airflow through the wall is a significant factor, like all the other walls are tight and this wall is the big leaker, then it is worth it. If all the other walls and windows leak significantly, then don't bother unless you plan to eventually seal them all.
You might also consider adding additional insulation while that is open, both inside the wall cavity and perhaps as another layer on the outside. This might cost thousands, but given the high price of electricity there and typical air conditioning use, it probably will pay for itself in 8–15 years, as well as being a big improvement in comfort.
If you are going to replace windows, it will be way easier with the siding off than at any other time. The flanges are screwed into the cladding from outside. 14 years isn't all that old of a window, and a straight replacement isn't likely to save much. However, an upgraded replacement could well save on energy costs. Again the pay-for-itself period is probably in the 8–15 year range. Get an energy audit from your local utility (usually free) to learn more.
In searching for a suitable nylon screw, I came across threaded nylon rods which are readily available in lengths up to at least 6'. By cutting such rods I was able to obtain a stem of suitable length. These were inserted into holes drilled in the slab and fastened using epoxy. Then, a nylon nut (also readily available) was used to tighten a galvanized washer against the foam and pull it closer to the building.
This was moderately messy (drilling holes in the XPS for the rod and to countersink the nut made a billion little pieces of foam to clean up) and still involved the use of a bit of foam to seal over each nut/washer/rod.
Worse, the XPS was not willing to move all the way to the building in some places. Where there was less than a 2" gap the approach worked. For the largest gaps, the XPS began crushing beneath the washer before coming flush to the building.
The remaining gaps led me to choose to spray more to fill these gaps and then, rather than flashing it all with aluminum sheet metal, we used an elastomeric paint over a fabric to extend the house's water barrier over the foam and down to the earth and to provide some mild protection for the foam. The result doesn't currently look very good but with another coat or possibly two it may improve.
Overall it's not a very satisfying solution but we couldn't come up with anything better.
Best Answer
If the height of the door to the bottom of the siding is any clue as to how high the floor slab is above the outside concrete, The siding could have been kept above the concrete perhaps 1" and still would cover the floor slab for weathering.
This will be an over-simplification, but to fix it, I would carefully cut the siding 4 1/2" above the concrete, add flashing, and insert a piece of 1 1/2" X 3 1/2" PVC material as a "frieze board" to replace the rotted siding. If you re in a temperate climate, like the new england area the PVC will move a lot so it may be best to use a wood product that is primed on all sides, including all cuts. Installed so when it is raised to meet the flashing, it provides a 1" gap to the concrete.