Welcome to the forum! I'm glad to see another KARR fan here too. I love KARR as much as I love KITT!
As to your question, from what I gathered from the pilot episode, Trust Doesn't Rust and the book Trust Doesn't Rust (which goes into a little more detail), Tanya's gang was hot after Wilton Knight trying to steal his technology or get after him. Michael got caught up with the same crowd in a sting but Wilton knew of him and already chose him to be a driver for the new vehicle. Well, from the book, there aparently wasn't enough time by the time Wilton had to move operations from where he built KARR to his mantion. So, Devon thought Wilton had KARR dismantled before the move and thus didn't realize KARR was simply stored and left behind. Apparently there was no time to lose and they had to move out quick, not taking KARR with them. Which I think is dumb because supposedly they took everything else. So, Devon himself endeavors to create KITT, with a little help from the dying Wilton Knight. After Michael got shot, this is why they had to rush to get KITT together. Devon didn't know KARR was still in existance then and Wilton needed a car for Michael. I guess Wilton never told Devon that KARR was left behind intact. Or, the technicians were SUPPOSED to dismantle KARR but there was a lot of confusion during the move and neither of the older men realized KARR was still intact. Thus KITT was created specifically for Michael's use after Wilton had his doctor save Michael's life and give him a new face - that of Wilton's errant son, Garthe!
So that is why they didn't do any rebuilding or further work on KARR. From what I got from the episodes and book, apparently it was a misunderstanding in communication during a quick pullout that led to KARR not being dismantled. Apparently I guess maybe they WERE going to rebuild him (or maybe KITT) from scratch anyway, but with Michael getting shot just after the quick pull-out, plans went all awry.
WHY Wilton would order KARR dismantled instead of reworked is beyond me. In TDR, Bonnie said that KARR was "before my time" meaning she was not on the original Knight Industries team that put KARR together.
Of course, the writers have left a lot of holes in the story in many areas, not just with KARR. I guess they used KARR as an interesting episode a couple of times (the second time creating one of Knight Rider's most popular and best episodes ever). I wish they had developed KARR's character more too. I loved the KITT vs. KARR version of KARR the best!
I'm hoping to see KARR in a new Knight Rider movie some day (if they really make one) and have him return as a bad guy that turns into a good guy and works with KITT.
Of coure my explaination may not be sound either. But perhaps others may shine some light on the subject. It's one of the Mysteries of KARR that intrigues me.