Great project...I'm thinking of 4x5 or 8x10 pinhole myself. I'm leaning more towards 4x5 as I don't have an 8x10 enlarger. However, 8x10 contact sheets would be nice to work with.
1. 8x10 isn't too big. It actually is probably easier in terms of handling the materials to build it than say a 35mm panoramic pinhole.
2. Yes, definately start with paper to see if your design is flawed and if you're getting the characteristics you want.
3. I would personally build one for holders. If you ever wanted to get into negatives, that's the only way to go. Getting them flat would be a pain and it would take you forever to bracket a particular scene. At least with holders you can shoot 4 photos in 10 minutes as opposed to 4 photos in a few hours. It will save you time in the end. Not sure if his calculations are perfect, but from what I've read, that seems pretty close. Others might have different experiences.
Good luck -keep us posted on how the project is going.