The question is do the core clauses apply or not? I can’t see how you can pick and choose which ones you want to apply since the contract doesn’t provide for that. Stage 1 can be Option C or E, so whilst I understand the sentiment of what you say (which has always been the case for ECC Option E contracts without X22) it’s impossible to conclude that the PM is in breach of contract for acting as they are. The PM in your case is merely trying to understand the implications of the instruction before it is issued. Alternatively the PM could issue the instruction, then technically you still have to follow the CE procedure for quotation as well include the effects of it in the forecast, then if the effect is greater than anticipated it could later be removed from Scope with another instruction. Note that forecasts are of Defined Cost for Stage 1 and Project Cost and don’t deal with the time effects like compensation events.
Whether the Budget changes or not is a separate matter, the PM’s instruction might change the Budget, but not necessarily so.