So, the AI on my team will upgrade MY citadel on ... say. hard? i have been going against hard opponents, but my own teamates ive kept on easy for balance reasons. Namely with 2 buddies on hard we smash the ai too readily.
Upgrading takes quite a bit of cash, so the AIs need to have it in order to do the upgrades. If you're getting all the kills, they're only getting assist money at best and they need to balance between gear, consumables, and citadel upgrades.
And yes, what Demi-Guy said is correct, there is an award for most citadel upgrades which gets you favor points, but in SP-skirmish it doesn't really do anything. It matters in SP-Tournament and online games since your favor points online are tracked (and in Pantheon that's how you win the tourney).