The state and federal governments have announced the preferred route for the proposed new Dungowan Dam pipeline.

After months of extensive studies and technical investigations, it's proposed the new pipeline should run south of Dungowan Creek and the Peel River from the new dam to Tamworth Regional Council (TRC)'s Calala Water Treatment Plant.

NSW Water Minister Melinda Pavey said the project will bring great benefits to the community.

"In addition to the obvious benefits to water security, this project will provide much-needed employment and a boost to the local economy as it continues to recover from the drought and COVID-19," she said.

"With more than 230 local businesses already registering to be part of the project's register, the people of Tamworth and the Peel Valley can expect to see more and more contracts awarded to local goods and services providers during the months to come."

The pipeline will be built in two stages and the first will see a new reliable connection established from the recently completed Chaffey Dam pipeline to Tamworth's town water supply.

The second stage will be built alongside the new $480 million dam, depending on the outcomes of the final business case and Environmental Impact Statement.

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Both Member for New England Barnaby Joyce and Tamworth MP Kevin Anderson have thrown their support behind the project, arguing it will secure the region's water supply through future droughts.

The final business case for the proposed Dungowan Dam is expected to be complete by the end of this year.

The Productivity Commission report found that any increases in construction on the $480 million project would result in a blowout so significant the project would likely become unviable.

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