Overview
You are creating a team and want to know what the option to Create Record As a lead or contact means.
Information
Reps can import records into Plays from CRM or create them manually in Playbooks; when a record is created manually in Playbooks, it is then being created in your CRM instance and the setting Create Record As defines the type of record that will be created.
In other words, when a rep imports a record from CRM (e.g. by clicking "Add Person from Salesforce"), a new record is not being created in CRM (as it already exists). Records are only synced and created in CRM when they are created manually in Playbooks.
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