That sounds like a really cool project!

1) Yes, the water bottles diffuse the heat, but, they also store it. By storing the heat and using a good thermostat you can mitigate temperature swings in the incubator when you open/close it for air exchange/harvest.
2) The PC fan is good for air circulation so you reach a homogeneous air temperature in the incubator. If you have eggs stacked in levels then ideally you want the air temperature to be even and the hot air not just collecting at the top (water bottles help). If you are running close to the edge of the egg limits at 89-90F then the temperature difference could be lethal (especially in the later phases of development). I'm setting the temp this year at 86 degrees on the bottom and I'm going to see if I can get away with not using the fans in my incubators at all (too many cords - too many incubators). I've incubated between 83-90F without issue-just a variance in the amount of time required to hatch.
3) I built a custom incubator using rigid styrofoam insulation from Home Depot-and sealed it with silicone. It worked fine, but, I could smell 'burning plastic' every time I opened it. Probably should not have put the heating pad directly on the sytrofoam... I also used on/off thermostats for a long time prior to the rise of the internet-I refuse to use anything but pulse proportional now because temperature swings cost lives...

Oh, and be wary that some thermostat brands throw off some heat. If you have your thermostat sitting on top/beside your incubator you might generate a 'hot spot'-learning this cost me a clutch of Het Axanthic Fireflies last year...