Before you build the upgrade the Blundergat, should first obtain the Blundergat. You can do this in two ways, the Crystal skulls or from the Mystery Box.
The Blundergat can be upgraded to the Acidgat by building an Acid Gat Kit on one of the Workbenches in the prison. The three parts for building the kit are located in the starting area of the Cell Blocks (near the library), the Infirmary, and the Warden's Office.
Location 1 (Cell Blocks near library)
Location 2 (outside canteen, next to Afterlife switch)
Location 3 (As you exit Wardens Office, under the stairs straight ahead)
Location 1 Wardens Office (Straight ahead, as you enter wardens office on the right)
Location 2 Wardens Office (Turn left immediately as you enter the wardens office)
Location 3 Wardens Office (In mainroom, next to fireplace)
Location 1 (Infirmary, next to the bathtub)
Location 2 (Infirmary on table next to the bathtub, the golder spork comes from)
Location 3 (Infirmary, In hallway where you access roof in Afterlife)
Craft all three parts on a table, then put the Blundergat on the table to turn it into the Acidgat. This is tied in with the Acid Drip achievement / trophy. We recommend on the workbench on top level, which takes you towards the gondola to the docks.