Basically, the project involves modifying the neck of the guitar to add strings and frets to it. There are two ways of doing this: replacing the buttons with wood and frets, or replacing the neck with a real guitar neck. I did a button replacement, which is most likely somewhat cheaper but much more time intensive, whereas using a full real guitar neck would be more expensive, but give more professional results. I'll show both ways of doing it, though, so if it's easier to get your hands on a suitable guitar neck, I'd recommend that approach.
Step 1: Materials
1 guitar hero controller built out of a real guitar body - I'm using the Ashely International Rock Axe controller. -$80
1 Arduino microcontroller - $30
Guitar Strings - 6 is the usual number -$8
6 silicon diodes $3
If you're modifying the existing neck
1 block of wood big enough to fill in the area of the buttons - Ask for a piece of scrap walnut or maple at your lumber yard, it should only cost $2-4
Guitar Fret Wire - This can be purchased online for around $6
"If you're using a new neck"
1 guitar neck - Prices can range dramatically; I'd suggest looking for factory seconds or on craigslist
Lacquered wire - This is easiest and cheapest to find in the quantities we'll need in old headphones