How does the bleed setting work in eDoc builder?

The answer to this question depends upon the type of template you are referring to - standard forms or interactive designer.  In both instances you would set your master pdf to a size that accommodates the bleed.  For example, if you want your final piece to be 3.5" x 2" and you set your bleed to be .125" then your master pdf should be 3.75" x 2.25".  You would not set any bleed in your master pdf.  After uploading your master pdf into the template in eDoc builder, you would set the bleed on the template info tab in eDoc.  The way this bleed is displayed differs depending upon the template type:

Standard Forms Based Template
The preview that is displayed to the user removed the area included in the bleed.  In other words, the preview displayed to the user reflects the final product with the bleed removed.  Please see these screen shots to further explain:
Preview for user:

Production file: 

Interactive Designer Template
You will notice on the preview pane when customizing the template that there are two dotted lines  - one will be red and the other will be grey or white.  The red line on the template represents the bleed.  The white or gray line is a "safe zone."  This line is meant to indicate to the user that any text or images beyond this line are going to be close to the cutting line.  The width of both lines will be the same.  For example, if you set a 9 point bleed in the template info tab, you will see the red dashed line at 9 points and the white or gray line at 18 points.  Neither of these lines will prevent the user from adding text or images outside of the bleed or safe zone.  Please see this screen shot for further explanation: