First, I would like to reiterate that I think some kind of checkin system should be part of the competition, whether it's every day, every other day or every three days. this would keep us as a group informed of who is actually left in the competition instead of having us wonder for all eternity if somebody (or their character ) is still alive and competing...
I was also thinking (something I try to avoid) about the thing with armor and smithing, and I think I have a viable alternative for us to think about. What if we had an AR cap at say 200 or 300, rather than not allowing smithing and perks and all of that? That would reduce the advantage of "tanked" characters a bit, while realistically allowing armor to be used and smithed.
About the role playing, Did you ever see an ancient and very funny movie called "the Great Race"? The premise for the movie was the death of a guy (Jimmy Durante yet) in a car wreck (I think) who had a treasure map, and all of the people who stopped to render aid or "looky lou" ended up in a mad scrabble to find this treasure. A couple of people have mentioned having a Dead is Dead treasure hunt, so... Suppose we were to have somebody who plays Skyrim but is not in the competition pick a spot to randomly place a "treasure". It doesn't actually have to be placed ingame, but when we report our completed quests or side quests, whoever finds (that is visits the mystery chest) the treasure gets a beautifully gift-wrapped no-prize, or a golden fishy stick or something.
For role play purposes, we could be a random group who somehow hear of this fabulous treasure and set out separately to find it. While we cold all be guards, or something similar, I think there are some issues with putting that together in a workable fashion. I mean, are we all going to kill guards to get armor, or do we have to steal it?
Anyway, that's all I can think of.
BTW, if there are not enough people to really have two separate competitions (modded and unmodded) I would disable mods or agree not to use the whatevers they provide.