Contractors started work on the University Union building last month, with the upgrade expected to be completed in June 2012.
Property services director Barry MacKay said the construction costs for the project would be shared by the University of Otago and a company, University Union Ltd.
University Union Ltd is a company jointly owned by the University of Otago and the Otago University Students Association, he said.
"The site establishment and demolition stages of the project are well under way and the contractor is making full use of the students being away at this time of the year,"
The building redevelopment was one of the first steps in a revitalisation project for the union building area and lawn, as part of the campus master plan, university chief operating officer John Patrick told a public lecture audience recently.
Eventually, the union lawn precinct might include such developments as an expanded retail area, and perhaps even a tavern, Mr Patrick said.
The university spent about $1.5 million to develop its campus master plan, which was released with much fanfare and to public acclaim in May 2010.
