It keeps every mod in its own separate folder, makes copies of the files to put in the override, keeps track of every file associates with a certain mod and does not allow for overwriting of existing files.
So for example, if you isntall a mod through the KMM, then alter one of the files manually or otherwise, you'll get a warning.
The mods I installed throught KMM are are almost exclusively textures (.tga and .txi), so I deemed them rather riskfree. There are three exceptions, however:
Better Male Bodies, which replaces the original potato-sackish male model with N_CommM.mdl/mdx
Vibroweapon Replacement, which introduces new vibroweapon-models
The Widescreen UI-Fix which adjusts the UI to 1920x1080
I just found one of the files (P_MandB.tga) is apparently a reworked texture for Mandalore, which however presently is superseded by the texture and model from Movie-Mandalorians installed through tslpatcher.
EDIT: Eliminating N_CommM.mdl/mdx from Better Male Bodies from the override didn't help.