The PM has not issued any Notice of defect.
The Contractor requested concession which was not granted and therefore had to make the design compliant. Is this rework considered disallowed costs?
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Under option C the only things you can disallow are costs that state specifically you can disallow. Otherwise any such cost would be shared under the option C mechanism i.e. you wont change the target price but they will eat into their own gainshare. I can understand why you may think this should be disallowed, along with the cost of correcting defects before Completion (which are also payable and hence shared). However, unless it fits a specific reason for it being disallowed then no it is not disallowable.