Edited to add
Based on the comments on this answer, it appears that Xcode updates via the system Software Update were delayed, appearing quite a bit after they became available for manual download from the developer portal.
It may even be that Apple fits them into times when their network usage was low, which could delay an update even if you clear out your old copy and reinstall the not-quite-up-to-date version. Perhaps the update would appear if you waited several days.
Previous answer
Xcode has never, ever updated for me through Software Update, and it's never updated for the dozen or so developers I work with. The Apple employees that I follow on Twitter -- guys like Jake Behrens, Michael Jurewitz (the dev tools evangelist), Chris Hanson, and Bill Bumgarner -- along with former Apple employees who are devs and other high-profile devs I follow, all tweet something along the lines of, "hey devs, time to visit the developer portal to download the new version of Xcode" when an update comes out.
Are you absolutely certain Xcode updates are arriving automatically for your coworkers? Have you seen it happen? Are you sure they're not pulling your leg? I've certainly never heard of it and consistently hear the opposite, so it sure seems unlikely to me.
The only automatic Xcode updating I'm aware of for Xcode 4, and only then if it was purchased through the Mac App Store and not downloaded from the portal, and only then if you launch the App Store and click on the update, which really isn't very automatic.
Yeah, a lot of people have been facing this issue. First, cancel your update. (In the AppStore update window hold Option to show the Cancel button.)
Now, you can do two things:
Download and install the Xcode DMG from here (if you have an Apple Developer Account)
Or try clearing your cache, and restart the download from the app store. You can use third-party apps or enter this command in your terminal:
rm -rf "$(getconf DARWIN_USER_CACHE_DIR)/com.apple.appstore"
Best Answer
I've had this happen with other apps in the past and what works for me is to:
The restart is probably not needed in the vast majority of cases, but it ensures that no files from the app are still open from any process still running.
At that point, the app store should have a good shot to install the app (Xcode in your case).