With the exception of only the very earliest levels, it’s a complete waste of time and money. Its inability to accept magic and its unreliability in the face of damage reduction makes it not worth using at all.
Note that this has absolutely nothing to do with the upkeep issue—a month is extremely long time for an adventurer, and 25 gp is an extremely small amount of money. 350 gp upgrades this weapon as far as it can go, and that’s chump change, particularly on a per-month basis. A 1st level character cannot afford that—but an adventurer doesn’t stay 1st level for a whole month, either. Under the default guidelines, a month of adventuring is enough to gain approximately nine levels (an average of 4 encounters per day, approximately 13 encounters per level-up, per Dungeon Master’s Guide pg. 41). A 10th level character might very well not bother to track gold pieces in units smaller than 1,000 gp.
However, for a 1st-level character, upgrading it once and using it until enemies start demanding magic weaponry (at best, 5th level, but probably more like 3rd—long before the weapon begins to degrade) isn’t just a reasonable option: it’s the clearly best option. No weapon in the game deals that much damage, much less a simple one-handed one.
So basically, no, it’s not balanced; either you need magic too much and you can’t use it, or you don’t and it’s overpowered.
To make a workable weapon, it needs to be compatible with magic (and it needs to work better with special materials; a 25% chance to pierce is not useful), but then its damage is much too high. For a weird, ad hoc weapon, the simple category isn’t appropriate at all—flails are difficult to use, and this one is even more so since it’s not well made. This has all the hallmarks of an exotic weapon—unique mechanics, bizarre description, potential for upsides.
However, even as a magic-compatible exotic weapon, the upkeep mechanic has serious problems. The numbers you can get are very, very good: it provides somewhere in the neighborhood of a +8 bonus to damage. Power Attack cannot match that for several levels, and then only with a two-hander and accepting a −4 penalty. That’s a huge bonus for caring about upkeep—which is typically below 3.5’s abstraction threshold. Upkeep happens in the background. Players can bring it more into the foreground if it interests them, but getting a bonus for doing so, particularly one this large, forces players to do so. Including those who are not interested in doing so, and will find it unfun interacting with the weapon's upkeep mechanic (but do it anyway, because they must).
A better solution for a weapon that is gradually built up by combing battlefields would be one that scales with character level. Then an Exotic Weapon Proficiency feat can be directly compared with Power Attack to balance it. This is far more in keeping with 3.5’s design and makes the option far more amenable to comparison and balancing.