In summary, this is intended behavior. Unlike in Gal Civ 2, upgrades cannot be built directly, you have to upgrade each step in turn.

Yep, I understand that improvement upgrades auto-queue with tech discovery.

Its just that for eg,  when I cancel an upgrade to an existing basic factory, the Xeno factory improvement comes up on the colonys improvement list (not in the build queue). So I can then build a Xeno factory directly on a blank improvement tile without needing to build the basic factory first.

Additionally, the cost of upgrading an existing structure seems to the be  same as that for building from scratch. 

Either way, it seems to me that there is an bug here. 

Actually you can't. It may seem from the UI that you can, but if you try to build on the blank space, the Xeno Factory icon still only goes over the upgradable factory. At least that's what happened when I tried it last week.

No your both correct. Previously, I stopped once the option to build xeno factory became visible in the improvements list, retried this and found exactly what you describe. It seems like its behaving as mentioned, but it is a little clunky in its behaviour.

I do feel the cost to upgrade is way too high, with Xeno factory perhaps it should have been +15 to upgrade instead of +45 (ie so the total cost of basic factory and Xeno combined is 45 as opposed to 75 as it now stands

Although this is a "Feature" not a bug, I did point out before the release during Beta 5/6 that only allowing building of the base building then auto-upgrading it was certain to confuse a lot of new players.