Having just run through a bit of this with my 90Q, I figured I would write about it while everything was still fresh in my mind. The systems are so similar that this really applies to most of the 5 cylinder engines, of course.
The basic symptom was a coolant temperature gauge that would only rise just out of the "cold" region. The car made heat, not in prodigious amounts, but enough to get by at ambient temps dropping to about freezing, so far.
There are several possible problems that can have this result. They are, in descending order of difficulty to fix:
I started my diagnostic by checking the sender and gauge functions, clumsily, but close to the prescription in the Bentley manual.
First you unplug the multi-function sender, which is located on the bottom of the top radiator hose flange. It is a four terminal unit, and they are marked, just barely. The one we are interested in is marked "T". (This is accurate for the 80/90/100/200 cars but will be different for the older models)
By connecting a resistor from this terminal on the harness to ground, we can simulate the function of the sender and check the gauge operation. Bentley says that 660 ohms should result in gauge deflection staying in the "cold" range, and 50 ohms should result in the gauge going to the "too hot" region, indicated by two tiny dots on the gauge about 3/4 of the way up. This only works with the ignition switch turned "on," though the engine does not need to be running.
My gauge worked fine.
To check the sender itself, I removed it and held it in some boiling water and measured its resistance. Actually what I did was test one I stole from Brendan's "new" NF engine which had just been delivered by Chris Semple of Force 5 Automotive, since he will not need it when the engine is installed in his 4000 Quattro.
The spare yielded a resistance of about 120 ohms in boiling water, so I figured (without a true spec for it) that it at least basically worked. I threw it in the car, but there was no change.
So I picked up a new thermostat, since they can't hurt and they are cheap. At the same time I realised that if the sender was not grounded well due to years of gook and corrosion on the hose flange, that would throw off the reading - and incidentally, screw up the ignition and fuel computer temperature senders which are in the top of that flange. I wound up fixing two things at once, which spoils the scientific results, i will never truly know what the problem was.
To fix the flange ground, work with the engine cold, so there is no pressure int he system. Carefully remove the easy bolt holding it the head. Try not to disturb the gasket. Clean the threads in the head with some contact cleaner and maybe a tiny brush. Wire brush the area on the flange where the bolt and washer go. Clean the bolt up or replace it with a shiny new one. Reinstall, being careful not to overtorque it, which might make the gasket leak.
Replacing the thermostat requires having double jointed elbows and small hands, but other than that it is pretty straightforward. The thermostat is mounted under the lower radiator hose flange, on the block. Put a container under the car to catch the coolant that will escape (up to a couple of gallons). Remove the radiator cover and undo the hose clamp to the flange, remove the hose and push it aside. Struggle with sockets and ratchets and universal joints to pull the two bolts. Pull the flange off and out of the way. Pry the old thermostat out - this is almost always difficult, and is not made any easier by the lack of ready access for big prying tools. It is ok to wreck the thermostat, but not ok to gouge up the engine block. A bunch more coolant spills out of the block at this point.
With the thermostat out of the way, the flange can be removed from the car (that is why we disconnected the hose) and cleaned up to your satisfaction. Also, the thermostat mounting location can be cleaned up a bit, making sure to rinse the area with some water to get rid of crud.
To install the thermostat, attach the gasket that should have come with it, to the outside. I like to make a bit of a mess with anti-seize compound in hopes of making the next replacement easier (this should be done once a year). Snake the flange back through its hole in the side radiator cover and out of the way a bit. Push the thermostat into its position in the block, orienting the metal bar thing so it is vertical - the instructions in the manual say something about an arrow on the housing, but no one has ever seen one of these arrows. We settle for the vertical alignment to imitate the picture. Align the flange over the thermostat and push it into place, squishing the gasket a bit. Replace the bolts, again, don't over torque them (as if you could with the access available!). Push the hose back onto the flange, and secure it with a nice new stainless steel hose clamp, orienting the screw for ease of future access.
Now the cooling system is sealed it is time to fill it up again and check for leaks and proper functioning. Undo the top radiator hose fitting (Carefully! Don't break that plastic nipple!) and pull off the hose. Pour a bunch of 50/50 mixed coolant into the hose, filling the block. This takes about 1/2 gallon or so. Reattach the hose using a new hose clamp. Remove the coolant expansion tank cap and fill the tank up almost to the top. The level may slowly drop at this point, just add more.
Now it is time to run the engine, to check for leaks and get the air out of the system. It is nice to be able to dry things up a bit and have some clean cardboard under the engine so any leaks will show up quickly. I backed the car out, turned it right off, rinsed the engine areas a bit that were messy with coolant, moved my bucket away, and brought the car back inside.
Place the cap loosely on the expansion tank. Start the car (make sure the area is well ventilated, since running the car produces poisonous fumes which you must not breathe!) and let it idle. It will warm up, and eventually the thermostat will start to open, allowing the hot coolant to flow through the top hose into the radiator. During this time the level in the expansion tank may fall, you can top it up as you go. take a look at the coolant temperature gauge periodically to see how it is doing.
Ideally you run the engine until the radiator fan comes on, but mine wouldn't quite get there (even with the heater turned "off"). I turned it off, topped up the expansion tank, tightly replaced the cap, and turned the engine back on, so some pressure could build. Then I used the bleeder bolt on top of the radiator to release the small amount of air in the top of the radiator - this was easier with the system pressurized.
There were no leaks, so I went for a test drive. The coolant gauge was rising preoperly - just over half way idling in my garage, just below half way driving around at about freezing. The car was making heat, more heat than before. A lot more. I had to turn it down. This indicates that the thermostat was indeed in need of replacement, so I will never really know if the grounding work I did was at all necessary.
Disposing of coolant is not a trivial matter. It is poisonous, and yummy (sweet) to animals, so do not just dump it. Any that spilled on the ground should be rinsed away with plenty of fresh water, diluting it. Ideally the leftover drained coolant can be fermented and turned into a delightful dark greenish-blue wine, making you the toast of the party circuit later in the winter. Well, among the survivors, anyway.
By the way. If your cooling system is aging, is is very likely to present a cascading series of failures. Each time your replace an old part, the system pressure will rise due the leakage being removed and the next part in line in terms of weakness will fail soon. With an older vehicle, it is a good idea (and very satisfying) to rebuild the entire system at once, making a minimum of times you have to deal with coolant everywhere, both on the road and in your work area. Items to replace: heater core, heater valve, about seven or so hoses, thermostat, water pump (and associated parts exposed - timing belt, idler, crank seal), and maybe the radiator. Heck, might as well get a new expansion tank (they are cheap) and cap while you're at it!