Yes, you chop a section out of the top hose (equal in length to the length of the adapter). Install the adapter and fit the sender. The sender will have a feed wire coming from the gauge and the body of the sender must be earthed to the car chassis. Since you will probably have to use PTFE tape between the sender and the adapter hole to give a good seal, you'll probably need to use a crimp eyelet as per my post above.
Do not overtighten the sender in the adapter in an effort to get a seal. The adapter is fairly soft aluminium and there is a chance of wrecking the tapping.
When buying a gauge try to find one with the red 'overheat' marking starting at 110 deg. The FIAT FIRE engine runs pretty hot and in traffic the gauge may well be sitting at 100-105deg (exit temp of water coming from the head) - doesn't look too clever if the needle is in the red zone. Mine starts at 105deg which is about where the fan kicks in, so if the needle goes into the red then I know it is REALLY overheating.