Seems like your tear down and clean up is definitely needed. Yes, the shim is for bearing clearance. You should check the clearance all around via plasti-gauge. I found that my original con rod was defective, bored at an angle. I had 7 mils clearance on one side, while zero on the other! A replacement con rod was also defective, though just due to being bored with bent bolts holding the cap on. I was able to farmer-fix that one.
I think these engines can be made into good runners with longevity if you consider them kits and take your time and check out everything very carefully. Assuming that any part or machining operation is OK is a mistake. Even basics like cylinder length and squareness, flatness of head and top of cylinder, squareness of the block deck, liner fit to cylinder and liner protrusion are often screwed up.
The gear train play is almost always grossly excessive, as whatever drill jig they use is defective. XYZer identified that problem by comparing to the original. His offset idler helped get that under control for my machine.
I had my cylinder squared and milled at a machine shop, as it was too long to get head clearance withing spec. It was about 6 mils off of true, and 20 mils too long. I flattened the head and top of the cylinder myself by hand, also hand filed and lapped the excessive liner protrusion. Plus all the minor fixes listed in the Utterpower CD.
