After you make the strips and if they are conistent in width then you cut the block that size. If all came out to 8 1/2 then you would cut 8 1/2" Or if they all were consistent at 8 1/4 then cut the square 8 1/4
Rail fence is flexible in size just as long the block is square. In your example they should have been cut at 8". Your blocks will be a bit smaller than planned but if all are square then it is ok.