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2.) Press that quickslot key to activate/use the hammer.
3.) While using the hammer, press the middle mouse button to get the radial menu and choose the top-most option (upgrade).
4.) Use hammer to upgrade base items.
Aside from bugs... I've also seen this same EXACT question posted from other players multiple times who really just didn't know how an upgrade was performed in this game; they really didn't know all the combinations and steps required. There are a vast amount of games with base building... some with similar, yet different mechanics, and others with very different methods. It's easy to just miss a single step in the process and not get something to work.
Nowhere in OPs post do they mention the use of a hammer or any actual upgrade process steps. Over 25+ years experience in IT and gaming reminds you to start with the VERY BASIC troubleshooting, even if it seems silly. Before troubleshooting a bug or issue with upgrading, I wanted to first ensure OP wasn't asking how to upgrade.