The first upgrade requires you to be at least level nine, and have a population of at least 1,150 citizens to undertake. You'll see a green arrow above the building, signifying that you're ready to upgrade it, and will need to enter into the familiar process of collecting building materials to actually do so. You'll need three each of Welding Torches, Staplers, Water Faucets, Pipe Wrenches and Rubber Boots. Once those are collected, your building will go to its Level 2 state, becoming a more complex building with a new van parked out front. And oh yeah - you'll be able to house 650 citizens in your town as well.
If that simply isn't enough for you, you can continue to upgrade the building to Level 3. Level 3 requires you to have a population of at least 2,800 citizens. As this is the second of the building's upgrades, it's also harder, requiring six each of the building ingredients required above. You'll be able to purchase a single unit of each ingredient for 6 City Cash each, or can go about things the old fashioned (albeit slower way), by asking your friends to send you these ingredients instead.
Again, once you've collected the necessary building materials, you'll see another visual transformation to the building, and will finally be able to house the full 1,050 citizens allowed by your new building. If you're looking for a way to increase your population cap without taking up anymore room in your city with buildings, remember to keep these upgrades in mind, as they just might end up being a life (city?) saver.
Will you upgrade your City Works building, or does your town already have a high enough population cap as it is? Are you the type that can't stand to leave a building un-upgraded when upgrades are available? Sound off in the comments.