Without knowing the specific end use and history of the wood or the scale of the project I can only give you three general techniques and you can choose which one suits your needs best.
- Paste Filler.
This comes in a variety of forms but essentially its exactly what it sounds like. It hardens to a sand-able surface, takes stain and finish more like wood than other fillers and some varieties can be applied in large quantities (hardwood floors filler). Some are water based, and some use solvents (acetone and MEK). In this case (and this case only) the water based is just as good as solvent but not if it's for exterior use.
- Oil Putty.
This is the finish carpenter's choice for puttying nail holes in finish grade trim and other small repairs and fills. It comes in a variety of colors that can be mixed to achieve any shade. The putty is applied after finish so it goes on soft and stays flexible. Its great for small fixes but would be impractical to patch large voids or large areas.
- Epoxy
This is just a clear, two-part adhesive tinted with pigment to create a hard, durable, stable patch, here's a helpful link: West System. This method is great for filling things like knots and surface checking. We primarily use it on reclaimed lumber to fill the defects prior to finishing. Epoxy can be used inside and out, on small or large areas but it is the most expensive of the three options.
Whatever your situation, one of these three should work. The only general advice I can give you is, whatever method you use, make sure your fill is at least as dark or darker than the wood. Light filler really stands out. The catch is that many woods (cherry, fir, mahogany) darken significantly over time so you have to adjust by eye and your gut. Cheers!
You say it's an old house. I suppose that if the siding was practically at the end of it's rope, plastering it with wood filler might extend its life a few years. I helped replace the siding on an old barn once that was practically plastered with putty. I don't know how long that treatment lasted; I only saw the final/end result (zillions of chunks of putty were falling out as the siding was being replaced).
So, I think it's safe to say that wood filler will eventually chip/come off, especially if it was applied over stripper soaked paint. Wood often contracts and expands to a greater degree than wood filler and old wood often erodes, which leads to putty failure. Putty shrinkage might have had something to do with the old barn, but that's something else to be aware of.
Under ideal/indoor conditions putty lasts for a very long time (decades, maybe), but in this case, it's exposed to the outdoor elements. So, I would hope the wood filler lasts for 7 years but I wouldn't expect it to last more than 14 years (it totally depends on too many untold variable). I don't think that this is an immediate problem; you should be okay for a while. But when the time comes, be prepared to replace the siding.
Also, the type of wood makes a difference. Oak, which is hard, will hold the putty better than pine or cedar which is soft. Oak trim is still very common... whereas really old houses might have been built entirely from oak.
It's possible that the contractors are just being lazy or hasty. Yeah, they had to sand it either way- either sand wood filler or sand wood- and sanding wood filler is a little easier. Plastering it all over siding is not usual. However, there may be a justifiable reason, like the siding was beyond saving/sanding, or there were so many cracks, all the way through the wood, that simply can't be sanded (in which case I would ask, why not replace the siding now).
Always ask the contractor for references.
Best Answer
The piece under the slider sill appears to be face nailed facia. You try removing this piece of wood, maybe they did water proof properly and only this piece of facia is rotting. If it is only the facia rotting then you could replace it and then to seal the gap, depending on the size, use a piece of foam backer rod and some exterior grade paintable caulking. The backer rod allows the caulking to properly expand and contract.
I'd pull the bottom piece and replace it with PVC facia. Home depot carries it but you could probably find others. After replaced use backer rod to fill the gap and caulking to seal it.
For caulking I'd probably go for something like:
GE M90026-30 Paintable Silicone Supreme Window & Door Sealant Caulk
For backrod size, you generally want something slightly bigger than the gap. Sometimes if the gap varies over the width you'd start with a larger diameter until it couldn't fit and then move to a smaller one.