A few thoughts, some of which will repeat what has been said:
1 - smoke lever causing binding: I have noticed that some Modern era engines have a problem with the smoke lever trying to push the piston past it's end of travel. I've fixed this by adjusting the bends in the lever
2 - article about fixing engine: It would be a good idea to find a copy, and read. As I recall, most of the fixes were about removing burrs from the side rods, and maybe reaming them.
3 - binding rods / out of quarter: Try running the engine with the rods removed to isolate the problem.
4 - Side to side play on rear (driven) axle:
A- Sometimes one of the wheels will rub against the frame or magnet, This can be fixed by putting a small washer between the wheel and the frame. I usually use 671M-23 or 671M-19 washers for this.
B - Sometimes the worm wheel (gear) rubs against the side of the well it sits in. It might need to be centered.
IMHO, neither of these issues can be fixed by opening up the gauge a bit. If you eliminate one source of rubbing this way, you will create another.
