First thanks everyone who posted replies here, I do learn a lot here. As a home owner as well as a very small business owner, I fully understand it is not easy to run a business. In my case, I do agree the contractor worked hard to fix the problem. So I have been trying to avoid contacting authorities, such as BBB, Consumer protection office in state attorney general or statement license board offices, or small clam court etc. I do want this issue to be resolved between the contractor and me.
The fact is that the contractor didn't deny including: 1) no more options available that he can fix; 2) the root cause is that this model doesn't fit my existing water pipe; 3) there is a valid warranty;
The conflict is that the contractor wants me to pay additional $2500 to replace a different models, which I don't think he has a base or valid reason.
Based on all replies and suggestions, I will still try to an amicable way first to negotiate with the contractor, that is, the new system carries a Nstar $1000 rebate for high efficient boiler, if I do get the rebate, I will give it to the contractor. I may or may not get refund since I already got one when I bought the first one. But I do want to mention to the contractor, if he dones'nt accept , I will bring this to third parties to decide who should pay this additional $2500. I will mention some names of these authorities.