Awesome idea, I am in!
My 2 cents:
I like elkhills idea of a higher cap, but points for keeping it cheaper. That gives options, and $200 is not that outrageous, especially because a lot of the stuff can be used for camping/hiking, not just sitting in a closet.
I like the idea of allowing homemade alternatives, if you write up or link to a tutorial of how to make it. Only seems fair, and then we can see if it really does cost less/nothing, or if you need to go out and buy $20 bucks worth of stuff to make the thing.
Along the same lines, I think you should be able to count stuff you got on sale, mostly because I get most of my stuff from http://www.steepandcheap.com
and I would hate to put the MSRP on some of that stuff.
I don't know about dumpster diving and then claiming it for free. I have never had luck with that, but I have friends that hit crazy scores. It seems too variable. Instead, I think we should assign a value to it, again like elkhills mentioned.
Otherwise I think you have a pretty good handle on the contest 2now, it all sounds fair so far. Can't wait to hear the final rules!