So, I have terrain included in my physics and also character controllers for my player avatar. Im not sure if its a bug or just me making assumptions but took me awhile to work out why characters did not stand on the terrain exactly. Turns out the capsule height must be set using the following formula.
Yup, the capsule 'length' refers to the length of the internal line segment, and the 'radius' is the spherical expansion around that line segment.
(The reasoning here was that any nonnegative value for length works under this interpretation, whereas if it referred to the line+radius, there would be invalid positive values.)