The blacksmiths of Skyrim are always happy to not only sell goods but make and improve them for you. Some blacksmiths are better than others however such as Eorlund Graymane who runs the legendary Sky Forge. Most blacksmiths can't live up to that level of skill and therefore they can only improve your equipment so much. Blacksmiths will charge you a fixed rate for the upgrade in addition to the cost of improving a specific item based on its value. The cost will dramatically start to increase each time you upgrade as more skill is required to improve the item. It is common for blacksmiths to give a small discount if you help them out with their problems. Blacksmiths can upgrade your item for half the price if you decide to give them the materials. They also require a gem if you are supplying materials as infusing weapons and armour with gems adds extra damage or damage resistance. With each gem type added the damage or resistance is improved. Be warned Blacksmiths are usually either greedy or wasteful and ask for more materials than would be needed.
You can also ask the blacksmith to smith you an entirely new weapon or armour providing you supply the materials and pay them for the extra workload.

There is also an uncapped version which allows you to upgrade past legendary as many times as you
like.

The following gems are used for these upgrade levels:
1st - Garnet
2nd - Amethyst
3rd - Ruby
4th - Sapphire
5th - Emerald
6th - Diamond
7+ - Flawless Diamond(Only for uncapped version)

The latest version is very much a kind of test version to see if the new feature to supply materials is working properly and also to test out the new forging feature so please report any bugs. There is a very slight 3 seconds delay after choosing an item to forge if you are forging a new weapon due to the mod searching for the needed items. Only items that can be crafted already are currently available for forging due to needing a recipe but they are easily created and I may add new items to be forged in future.

NOTE: This mod requires SKSE
Always make sure you have the latest SKSE version from http://skse.silverlock.org

Installation & usage:

Put all the files in
for 64 bit windows C:Program Files (x86)SteamSteamAppscommonskyrimData
and for 32 bit windows C:Program FilesSteamSteamAppscommonskyrimData

Speak to a blacksmith during the day and choose "I would like to upgrade my gear" and then give them the item you wish to upgrade and confirm or choose the dialogue option to supply the materials. You can also ask them to forge you a weapon providing you have the materials.

Change Log:
Version 0.5 -
*Added the brand new feature of having the blacksmith forge a totally new item by supplying the correct materials and paying the cost.

Version 0.4 -
*It now tells you what materials will be used when supplying materials for upgrades
and which ones you are missing.
*Upgrading with materials and the items needed has been tweaked slightly
*Large portions of code rewriten making the code smaller and easier to add new
features in future

Version 0.3 -
*Added the ability to supply materials for lower price
*Money now gets added to blacksmiths inventory
*Blacksmith book now added to player

Version 0.2 -
*Corrected dialogue and item labelling errors.
*Added disposition discounts
*Enchanted items cost more to upgrade
*Upgrade level depends on the Blacksmiths skill