The size of the Fresh Water Basin harbour posed limitations for boats turning and manoeuvring, which had been accentuated by potential hazards presented by possible rock fall and tree slides from the cliff face into the harbour.
MSDA board chairman Jeff Grant said the hazard had necessitated a 30m "exclusion zone" and a limitation on the type of boats that could use the berths near the cliff face.
The redevelopment of the harbour would address the operational and safety issues, he said.
"Smith and Crane Construction have started on extending the harbour promenade.
"Work is also starting on demolishing the existing breakwater and construction of the new breakwater 65m southward and dredging to enlarge the existing harbour."
Downer EDI was producing another 550cu m of rock armour in the Department of Conservation borrow pit at Milford Sound, which was originally established to provide rock armour for the recently completed Doc Cleddau flood protection works.
Mr Grant said the existing wharves at Fresh Water Basin would be replaced by floating wharves and realigned.
The new wharves were being constructed by Invercargill-based company E Type Engineering.
E Type general manager Phil McDowell said it was a rewarding project.
"At 45 tonnes apiece, these new floating wharves are challenging projects of the type we enjoy.
"The complexity of the work ... is very rewarding."
The programme had been timed to cause minimal disruption to visitors and operators at Milford Sound and was expected to be complete by August 31.
