A scant 1/4 inch is a thread shy of a true 1/4 inch seam. You should use the 1/4 for an 8 1/2 inch block. Another thing is in cutting the fabric are you cutting on the grain (up and down or side to side with the woven threads) or on the bias (across the woven threads). If you are not cutting on the stright of grain you may be stretching the fabric as you are stitching. The key to a perfect C. Window is in the cutting with EXACT measurements.
Try a practice block with the 1/4 inch seam. The bulk from the 1/2 inch seam may be the problem that is making your blocks a little off.