This museum charts Orkney's military involvement in the First and Second World Wars and provides a safe home for a major collection of wartime artefacts, many of national and international importance.
Orkney Islands councillors approved plans to restore the historic pump house at Lyness and construct an extension to the museum. Further plans will include repairs to the Romney Hut and options for the Oil Tank.
The new extension is being built to house an exhibition space, café, toilet facilities and information areas.
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Council Leader James Stockan said: "The problems we encountered in trying to take forward an all-encompassing project are among the main reasons why it has taken longer than we hoped to get to this stage.
"The remote location, the logistical challenges and the unique and complex nature of each of the buildings made it difficult to secure a contractor interested in tackling the project as a whole.
"We have now decided to focus on the pump house and museum extension and hope to be in a position to award a contract later in the summer so that construction work can begin in the autumn.
"First we need to discuss the revised project with the external funders and ensure their continuing support. The decision we took today is hugely important and will send a strong and reassuring signal to the funders that this project enjoys the full backing of the council."
This project will allow the museum to open all year round, encouraging more people to visit Hoy and boosting tourism throughout the island.
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