RS-485 Modbus - suitable for CNC machining motion control? or just VFD control?

No, I don't think that you are misunderstanding the encoders.
It might even be the case that the encoders "count up" to the current absolute position when powered up and that you retain absolute position feedback. (if not then you will need home/limit switches, as on any other similar machine.

Hello Jono,
I am also building a CNC very much like yours. I would be very happy to share some information. How are you builinding the BC head? With harmonic drives or planetary gear or slew drives? I am wondering a lot at the moment about this.

Best regards,
Peter