It was "very exciting" that the $35 million project's first stage was beginning 100 years after the original museum building had opened on the site, Otago Settlers Association president Dr Dot Page said.
The project's first stage -involving the construction of an $8.6 million artefact storage building - would later free up other parts of the museum complex for enhanced display areas, Dr Page said.
"We have marvellous treasures which we can't show off at the moment."
Cr Paul Hudson, chairman of the council's community development committee, said the project's beginning was partly a tribute to the work of Robert Tongue, who recently retired as city architect.
"It's been a long time coming, but it's really great," he said.
Museum board chairman Dr Melville Carr said it was a "red letter day," given the imminent construction of the twin-level, climate-controlled storage building.
A report written nearly 20 years ago by the former settlers museum director the late Elizabeth Hinds, starkly analysed the limitations of museum storage arrangements, including in the original Burnside building.
Heritage treasures were being damaged by excessive moisture or heat because there was no climate control, Mrs Hinds had warned.
Graeme Hall, the city council general manager, community life, said yesterday's ceremony marked a "really excellent milestone".
Construction contractor Lund South will begin physical work on site this week.
