Hunter Water Managing Director Darren Cleary said the major upgrade will also help deliver improved environmental outcomes.

"The design of the bioreactor, combined with the use of modern Membrane Bioreactor technology, means the new plant produces better quality treated wastewater," Mr Cleary said.

"A portion of that treated wastewater is then reused on a neighbouring farmland for irrigation, reducing the amount that is released to the Williams River, which is a great result.

"We're pleased to be able to deliver this significant upgrade project for the Dungog community and provide improved services that will enable growth for the future."

Construction has also begun on a new wastewater pump station at Dungog, which will replace the existing 75-year-old infrastructure and cater for increased capacity.

Construction is expected to be complete in early 2022.

Deputy Premier John Barilaro said the new facility will provide people in Dungog with safer waterways.

"As populations grow it is imperative that we as a government provide state-of-the-art facilities which incorporate innovative design for water and waste treatment to guarantee safer waterways," Mr Barilaro said.

Minister for Water, Property and Housing Melinda Pavey said this is a significant investment that will benefit the Dungog community for decades to come.

"This is a great outcome for Dungog, with the new plant replacing an ageing facility that was more than 80 years old," Mrs Pavey said.

"This $28 million investment will ensure the growing community is reliably serviced for many years, while also providing Hunter Water with ongoing confidence that it can continue to meet its environmental licensing commitments."