The $2.6 million job will catch an estimated 21 million litres of rain from the 142-lot Russells Creek residential estate - the equivalent of 76 per cent of the new subdivision's annual household demand.

Earthmoving equipment is set to start on a two-kilometre main trunk pipeline which is expected to be completed by April.

Connection pipes will be added as house construction starts next year on the north-west corner of Whites and Aberline roads.

The demonstration project has received $1.1 million from the Federal Government, $920,000 from the State Government and funding from Wannon Water and the subdivision owners Cove Land Developments Pty Ltd.

Wannon Water acting chief executive Andrew Jeffers said the project was significant.

"The demonstration site will provide a valuable working example of how developers, water corporations and councils can work together to reduce the water resource impact of expanding residential areas by simply harvesting water from the rooftops that are causing the increase in demand," he said.

"The project is believed to be the first of its kind in Australia.

''It will provide a working demonstration of a more sustainable approach to water management."