The tool length offset is not actually that useful for the Lobo CNC mill. (The PSCNC program was actually written long before the Lobo CNC machine existed. I added tool length offset because another milling machine I have uses NMTB 30 taper tooling where each tool or bit is pre-loaded in a holder which gives you a fixed tool length.) Note that with router collets, you don't want to mount the tool so that it bottoms out in the collet. This is because vibration will cause the end of the tool to effectively bounce off the bottom of the collet and the tool will creep out a small distance. I usually mount a bit by first pushing it all the way to the bottom, and then pulling it back out about 0.05" before tightening.
In general, every time I change a tool I re-zero the tool height off of the work piece. I usually do this visually with the aid of magnifiers and a flashlight to backlight the gap. I'll also use the technique of sliding a piece of paper back & forth between the bit and work piece and lower the spindle until it just catches the paper. (Then lower 0.003" more for the paper thickness.)
One application where the tool offset is useful is when using 1/8" shank bits equipped with a plastic stop ring. Here, you insert the tool up until the plastic ring rests against the end of the collet to give you a repeatable mounting height.
-Jeff