(This is well and done at this point - just documenting process)

The first step of this project is to decide what you want to do. The first thing you want to do is answer your why question: What do you want your controller to do? Put another way, how do you want to expand your experience? A few reasons people seem to do this:

1. Problems with the keyboard/mouse control you want to solve. 
2. Different kinds of output not usually available? 
3. A more immersive gameplay environment
4. Playing the game in a different way (for example, splitting up jobs between different people).

For me, I was primarily interested in augmenting my controls, and somewhat interested in immersion. I wanted to turn SAS on/off by mode, and I wanted joystick control without on-the-fly configuration of plane mode/rocket mode and without losing the ability to make precise gravity turns on one axis. I also wanted lots of buttons, because they make things fun. I wanted a few indicator lights and such for immersion, but not too many - because I usually play the game with different levels of output available on screen (eg. resources on/off, kerbal engineer on/off), and I didn't want to break that.

Once you've thought about why you are thinking about this, take a look at what some other people have done. There is a thread on the ksp forums with a pretty comprehensive gallery. Scroll through and see what you like. This should help you answer some more practical questions about how to satisfy your wants:

1. What kind of outputs do you want - do you want 8 segment digital displays, or do you want lots of dials to spin uncontrollably before you crash? 
2. Do you want controls, and if so which ones? Do you want to map everything, or just make a panel to supplement your keyboard input? 
3. What kind of form factor do you want? Something to replace the keyboard, go over the keyboard, or do you want to build it around the keyboard? On the extreme end, do you want to build yourself a proper simpit?
4. What kind of visual style do you want? Are you trying for something aircraft/apollo like, or do you want something more cartoony and fun.

Keep in mind some of these answers lead to more complexity than others. Personally, I was down for complexity, but I didn't want to buy any expensive dials, and I didn't want to end up with something too large. I did want something that would involve as little keyboard input as possible. I like the apollo-like look. 

I found two panels that I really like. The first is a panel by PeteWasEre, which I particularly love because it is comprehensive the way I want, and it is well documented by someone who knows what they were doing. The second is a panel by ajden I found later on, which is lovely, but has more outputs than I probably want. 

You'll need a list of components (see next post). You also need to pick a microcontroller (I'm going to use an Arduino duemilanove I have lying around for financial reasons). FInally, you need to pick a kerbal plugin to interface with. PeteWasEre used krpc, and I want to steal the code, so I'm using that. Other options are KSPserialio and kerbalsimpit.