That was actually the first controller I used for my first arcade joystick. They are very easy to hack to, just remember that the reset button doesn't have an LED attached to it (I'm s m r t)
mmk, to answer your questions, the reason why you want to use those quick female disconnects is so that you do not have to solder to the microswitch. If you're a pro soldering guy, then go for it, but personally for me it's 100 times easier to just crimp up 20 quick disconnects and push them onto the microswitch tabs. Also, different controllers have different requirements with grounds. Almost every single off-brand PSX controller will have a common ground though. What this means is that you only need to solder to one ground contact point, and from there attach all the grounds on the microswitches together that touch that ground. With the other side you have to wire them all individually.
If you need more help, here's an excellent page with some explanations.
http://www.darkravenwind.com/cdvision/superpad.htm -good luck
-CthulhuLuke