I did some adjustments to your script. Made the raycast layer dependent, etc. Tried to comment as much as possible in the script. You need to set your plane/terrain to layer Ground, or it would not work.

JavaScript version:

//buildscript.js

// Watchtowers height over ground
var watchtowerHeight : float = 0;
// Holos height over ground
var holoHeight : float = 0;
// Watchtower prefab
var watchtower : GameObject;
// HoloPrefab
var watchtowerHoloPrefab : GameObject;
// The Holo Object
private var watchtowerHolo : GameObject;
// Is it time to build?
private var buildwatchtower : boolean = false;
// Should the build menu appear 
private var buildmenu : boolean = true;
// Size and position of the GUI Window
private var windowRect : Rect = Rect (20, 20, 120, 50);
// LayerInfo for Raycasting
private var LayerGround;

function Start () {
    // bit shift the index of the layer to get a bit mask
    LayerGround = 1 << LayerMask.NameToLayer("Ground");
    // Instantiates a Holo at Start
    watchtowerHolo = Instantiate(watchtowerHoloPrefab,new Vector3(0,0,0),Quaternion.identity);
    // And inactivates it
    watchtowerHolo.active = false;
}

function OnGUI () {
    // Register the window, if buildmenu is true
    if(buildmenu) {
        windowRect = GUI.Window (0, windowRect, buildmenu0, "Build");
    }
}

function Update() {
    // if it's time to build, do raycast and position the holo and check if mouse down to build
    if (buildwatchtower) {
       // Raycast the layer "Ground"
       var ray = Camera.mainCamera.ScreenPointToRay (Input.mousePosition);
        var hit : RaycastHit;
           if(Physics.Raycast(ray,hit,Mathf.Infinity,LayerGround)) {
              // if holo is not active, activate it
              if(!watchtowerHolo.active)
          watchtowerHolo.active = true;
         // Positioning the holo  
              watchtowerHolo.transform.position = new Vector3(hit.point.x,holoHeight + hit.point.y,hit.point.z);
              // If mouse button down, build a watchtower
              if(Input.GetMouseButton(0))
           {
               Buildwatchtower0(hit);
           }
           }
    }
}

function buildmenu0 (WindowID : int) {

    if (GUI.Button (Rect(10,20,100,20), "Watch Tower")){
       // Now you can build 
       buildwatchtower = true;
       // Hides the build menu
       buildmenu = false;
       // You should hide the cursor, not lock it
       Screen.showCursor = false;
    }
}

function Buildwatchtower0(hit) {
    // instantiate a building
    Instantiate(watchtower,hit.point + Vector3(0,watchtowerHeight,0),Quaternion.identity);
    // turn holo to inactive
    watchtowerHolo.active = false;
    // not building any more
    buildwatchtower = false;
    // Show build menu
    buildmenu = true;
    // Show cursor
    Screen.showCursor = true;
}

C# version:

//buildscript.cs
using UnityEngine;
using System.Collections;

public class buildscript : MonoBehaviour {

    // Watchtowers height over ground
    public float watchtowerHeight = 0;
    // Holos height over ground
    public float holoHeight = 0;
    // Watchtower prefab
    public GameObject watchtower;
    // HoloPrefab
    public GameObject watchtowerHoloPrefab;
    // The Holo Object
    private GameObject watchtowerHolo;
    // Is it time to build?
    private bool buildwatchtower = false;
    // Should the build menu appear 
    private bool buildmenu = true;
    // Size and position of the GUI Window
    private Rect windowRect = new Rect (20, 20, 120, 50);
    // LayerInfo for Raycasting
    private LayerMask LayerGround;

    void Start () {
       // bit shift the index of the layer to get a bit mask
       LayerGround = 1 << LayerMask.NameToLayer("Ground");
       // Instantiates a Holo at Start
       watchtowerHolo = (GameObject) GameObject.Instantiate(watchtowerHoloPrefab,new Vector3(0,0,0),Quaternion.identity);
       // And inactivates it
       watchtowerHolo.active = false;
    }

    void OnGUI () {
        // Register the window, if buildmenu is true
        if(buildmenu) {
           windowRect = GUI.Window (0, windowRect, buildmenu0, "Build");
        }
    }

    void Update() {
       // if it's time to build, do raycast and position the holo and check if mouse down to build
       if (buildwatchtower) {
         // Raycast the layer "Ground"
         Ray ray = Camera.mainCamera.ScreenPointToRay (Input.mousePosition);
           RaycastHit hit;
             if(Physics.Raycast(ray,out hit,Mathf.Infinity,LayerGround)) {
               // if holo is not active, activate it
               if(!watchtowerHolo.active)
              watchtowerHolo.active = true;
          // Positioning the holo 
               watchtowerHolo.transform.position = new Vector3(hit.point.x,holoHeight + hit.point.y,hit.point.z);
               // If mouse button down, build a watchtower
               if(Input.GetMouseButton(0))
             {
                 Buildwatchtower0(hit);
             }
             }
       }
    }

    void buildmenu0 (int WindowID) {

       if (GUI.Button (new Rect(10,20,100,20), "Watch Tower")){
         // Now you can build 
         buildwatchtower = true;
         // Hides the build menu
         buildmenu = false;
         // You should hide the cursor, not lock it
         Screen.showCursor = false;
        }
    }

    void Buildwatchtower0(RaycastHit hit) {
       // instantiate a building
       GameObject.Instantiate(watchtower,hit.point + new Vector3(0,watchtowerHeight,0),Quaternion.identity);
       // turn holo to inactive
       watchtowerHolo.active = false;
       // not building any more
       buildwatchtower = false;
       // Show build menu
       buildmenu = true;
       // Show cursor
       Screen.showCursor = true;
    }
}