Contour sets work in a similar way to layers. Create all of your contour sets first with the corresponding colours. NOTE: Only one contour set is active at a time. You must first select the contour set you want to apply so that a red dot appears adjacent to that contour set. Then you in the 3D window, right-click an object and choose "selection to active contour set"
As for limitations, I can't answer that question but I would presume that you could have a fair number of sets available.
Thanks for the response Rick, it seems that after a restart, things were acting as they should. I was able to create two different contour sets with different shades of grey. There are some issues with it still if you have more that one assembly in a file with both having multiple contour sets.