1/8" over a distance of say, 20 ft, results in a required resolution of 500 microradians, which requires a high-resolution encoder, resolver or theodolite, again, no trivial matter or cost.
Even at that distance, the beam spread is probably too large to get an accurate measurement, but now, you're stuck with two precision angle stages to calibrate and maintain, as well as designing the circuitry for two 4-quadrant detectors, or possibly PSD's, the multiplexing for the two sources, a robust centroid measurement algorithm, etc.
You can do this with only a theodolite, but a decent theodolite is more expensive than the laser measurement unit. Your theodolite can simply be placed in a known position with the two endpoints also known. Assuming that you can keep the retroreflector on the target on a line between the known endpoints, you can triangulate the position of the target with a single measurement.
TTFN