The development is to include a 60-bed care home and eight one-bedroom cottages at the site on School Road in Stonehaven's town centre.
The new home will replace the existing Edenholme, which opened in 1952 and currently has around 30 residents.
Morrision Construction was awarded the contract to build the development and the care village is to be completed by October 2012.
Provost Bill Howatson officially opened the project at a spade in the ground ceremony last week, commenting: "This is a fantastic concept and will provide services for older people in the area for many years to come.
"The new care home and accommodation will replace a facility that has served the community well and the council can build on this track record with tailored, modern facilities that will allow people to live a long, healthy, happy and independent life."
Chairman of Aberdeenshire Council's Social Work and Housing Committee, Councillor Gurudeo Saluja, added: "This is part of the council's plan to provide new homes and care facilities to our communities and respond to the changing needs of our towns.
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"The care village will bring together health, social care and housing to ensure that older people in Stonehaven can benefit from a first class facility that will form an important part of the community."
Facilities at the new home will include 24 hour nursing provision, 12 specialist dementia places, a skilled staff team delivering individualised care for older people in a living environment which offers them personal choice, control and a good quality of life.
A care village concept has also been devised by the Housing and Social Work Service to complement the care home and provide additional independent living solutions for older people.
The properties will be built to accommodate a greater use of telecare devices to allow people to live at home for longer.
In addition, tenants will be able to utilise the services and facilities of the care home as appropriate.
Chief Executive Colin Mackenzie said: "This care village has been carefully planned for many years and it is exciting to see the project now take shape and is part of our commitment to deliver the highest quality services.
"I commend all staff involved in this project to bring new facilities to not only benefit residents and tenants but will provide a valuable asset to the local community."
The Social Work and Housing Committee home approved the new care in 2008 as part of modernisation of the council's residential care homes.
Last year, Kincardine and Mearns Area Committee agreed that the proposed site at School Road was a suitable location for the new care village and a welcome development for the population of Stonehaven.
(JG/BMcC)
