Do i make contact with his wrist area with my outer arm?
Yes, and your other hand can do one of two things 1) come under his attacking wrist ready to quickly grab hold as well or 2) counter strike with a yokomen uchi to his neck or temple and then grab. Remember this is a soft block that should continue the circular movement of his strike, not a hard block.
When do you catch his hands to execute this version of shihonage?
You should grab as quickly as possible after he is committed himself to the attack, you could say when he is past the point of no return. Its all a matter of timing, and that takes time to learn.
Also remember to extend him along his front weak line to unbalance him before you turn under his arm, this should also turn his left shoulder away from you.
Extra bit. An additional way our school likes to unbalance uke is rather than just turning under uke's arm move into him kind of like a hip and shoulder movement, works great if your a bigger person!