Question and comment.
Question: Why would allowing 1/8" around the head be a bad thing? What's the theory there? Some turbulence concern?
It's not that bad, it will be OK. But, generally, if you can force the air to go through the fins, instead of leaving space for air to just go around the fins, it will cool better. The reason it is not that critical is that the air is only part of the cooling system - the oil also carries away heat. My engine just sits behind a huge opening with maybe 3/4" all around - because I have to have air bypass the engine to cool the pipe.
Note that in the past we have put baffles around the fins, to force air to go through the fins, and in particular, force air around the back side of the cylinder, where, with nothing else, the flow is very poor.
It's not much of an issue either way, what you have is probably OK, might be overthinking it. Cooling is usually not much of a problem, we are talking about (in the case of something like a PA75) an engine that could probably safely generate 5 HP, and it's being run at 3/4 HP.
Brett