It needs a bit more ventilation. Also the secret to getting constant temps isn't drilling holes in the WH thermostat, it's the placement of it. Take a look at the last link in my signature.
I've made and tinkered with exactly this same type of incubator and mine works great. But not until after I got the back (metal part) of the thermostat the right distance from the light and drilled some ventilation holes in the sides that I can regulate by putting corks in them if I need to. Also the fan is mounted so that there's a bit of space between the back of the fan and the side of the cooler. It does blow right over the light bulbs like yours does. Overall, great job!
If you are talking to me about ventilation, it has a 1 1/2" hole in the front bottom left corner.
As for drilling holes into the water heater thermostat, it is necessary if you don't have a powerful fan. If your fan is positioned in a certain area where the air flow can cool the thermostat quickly, then there isn't much need for holes being drilled into the thermostat.
And I know what you are saying about placement, I just didn't note that in my post above, but you can see that I did position the thermostat, with the back facing the light bulb about 2 inches away.
I always recommend modifying the thermostats.