Best approach for contractor block policy

My understanding of your rules: 
Rule 2 : allow vendors to receive emails from approved domain only.
Rule 3 : allow vendors to send emails to approved domain only.

If my understanding is correct, I don't think you can achieve R2 with DLP.
I'd recommend using Exchange Mail Flow Rules (Transport Rules) to block both incoming and outgoing messages.
If you do want to use Purview DLP, for R3 you can create a rule and set the conditions as below: 

1. Click Add condition and select Content is shared from Microsoft 365 > choose with people outside my organization.
2. Click Add group, then change the logic switch wrapper to NOT.
3. Inside that NOT group, click Add condition and select Recipient domain is. Type in your approved domain names. 

DLP give you the option to notify the vendors inside Outlook/OWA before they send an unapproved email using policy tips or send  notifications / alerts  when there's a policy violation.