Assuming the temp gauge worked before the engine was reworked and all you did was put in the new sender I'd say that's the problem area. One other thing to pay attention to is how much sealer or teflon tape you used to install it. Put enough of it on and you electrically insulate the sender from the head causing eratic readings.
A quick check for that situation is to put one probe of an ohm meter on the head and the other on the base of the sender. Resistance should read Zero or almost Zero, indicating a good electrical connection between the two. If you find that to be the problem pull it out and clean things up and use a small amount of silicone sealer on the threads to reinstall it.
Installed in the head or the thermostat housing shouldn't cause much variation on your gauge if your head locates the sender just back from #1 cylinder.
Mike
