Actually, it is kind of hard to make a secure solution that takes arbitrary submitted source code, compiles it, runs it, and finally times it with high precisio

Actually, it is kind of hard to make a secure solution that takes arbitrary submitted source code, compiles it, runs it, and finally times it with high precision. Sandboxing in a VM is unfortunately not feasible since timing is very hard to do. And as for the question if this is a legitimate paranoia: yes it is. Many contestants are very smart, and there have been hacks and security breaches in high-profile contests.