Good idea, I like the sound of this one.

... just to clarify, I think it would be nice to have both approaches as options.

Personally; I would likely pay cash for my attack fleets even when/if this option was available. The benefits of upgrading them in place (whether a genuine upgrade, or just weapons re-tooling) are well worth the money when I'm in an offensive situation (and hence potentially a long way away from my planets).

I would mostly find it useful for all the planetary defenders that (in my games) often end up being generations behind my technology levels (although it can be amusing having those 2 Att. defenders sitting around when the new ones are rolling off the line on 75). It's just a little more convenient than having to launch the ship, upgrade it, wait a bit, and then land it again. When dealing with large empires this can take a significant amount of time.

When you upgrade a ship class, give it a new name - i.e. Fighter Mk1, Fighter Mk2, etc... otherwise you'll end up with a mess! Some people use complex naming conventions that include attack/defense/speed ratings for the class.

I know it doesn't seem very logical that a ship could be upgraded "in place," without returning to a starport or starbase. Maybe there is a network of invisible support/repair ships roaming around that perform the actual upgrade, and that's what you're paying for. At any rate, on a strategic and gameplay level I think it works fine.

I'm not a big fan of micromanagement, unless it actually adds some challenge to the game. A system where we had to move ships back to planet orbits for an upgrade, and then back to where you want them on the map, just seems like busywork to me. At least the upgrade isn't instantaneous, and there are some strategic concerns like not letting a ship sit defenseless in enemy territory during the upgrade cycle.

Upgrading in-place also means the map is a less cluttered when you're tracking ship movements (your own, and those of other races). All ships are performing their primary role. You don't have to wonder if the AI is moving a ship somewhere just to get an upgrade, or if it's doing something strategically more important. All movements right now are strategically important.

Well, normally I'm in favor of more options, and I do see the argument for a choice between expensive "in place" upgrades vs. returning to a starport for cheaper ones.

I still think my last point is relevant though, assuming the AI can also choose which option to use (and is good enough to make the right choice). I don't want to guess whether the AI is moving a ship for reasons that don't immediately threaten me, or for strategic reasons that might be a more immediate threat. This is especially true for areas of the map where I don't have full sensor coverage, and it may not be clear where the ship is headed.

I was thinking about this earlier. The costs of upgrading a class of ships is madly expensive. Unless you're well into the game (some four to six years, depending... at least in my case  ) it is really hard to upgrade ships. My solution is I don't make a new class of ship until I have maxed out a tier of defense or offense. So let's say I'm researching plasma weapons. The next class won't be built until I have the top end of Plasma, and so on with everything else. To expensive otherwise. I also replace in terms of fleets, rather than individual ships. But that's me.