Hi Bob,
Remember these words of wisdom (that some guy a lot smarter than me came up with) :
"In business, you don't get what you deserve, you get what you negotiate."
In your situation I would say this; if the pipe is supplied by you and is out of specification (ie - excessive out of roundness), I would expect you to compensate the contractor for any work / equipment costs that go beyond what the contract was for (presumably normal fit up and welding).
If the contract indicates the piping "mismatch" and has wording that requires the contractor to make corrections; or the contractor is supplying the pipe, your take is correct in my opinion.
Charles