Need smaller diameter discs...I know, I know

[runpasthefence]

So, I've been trying to solve some clearance issues I've been having for a while now. I need to narrow my front end by a good bit. I'd decided that the next step is to have some custom steel 16" wheels built.

In order to bring the track width in, I ordered a 16x7 wheel with 5.25" of backspace. After a conversation with the wheel builder, we determined the radius from the center of spindle to the outermost edge of the caliper (about 7", or a little less than 14" in diameter) was too wide for the stepped wheel.

Knowing that this is working in the opposite direction in terms of braking effectiveness, are there any disc/caliper combos that I can use that have a smaller overall diameter? The wheel builder recommends about 12".

Also, how does machining discs work? Anyone ever gone that route?