The proposed new prison at Wiri in South Auckland will be built and operated under a public-private partnership.
The Government has announced that construction on the new 960-bed prison will start in the second half of this year.
The prison is expected to open in 2015.
Fletcher Construction will build the prison which will be operated by Serco and maintained by Spotless Facility Services.
Corrections Minister Anne Tolley says the exact price of the 25-year contract will not be finalised until negotiations are complete, but the maximum potential price has been capped at $900 million.
Ms Tolley says the private operator of the new prison will be expected to reduce re-offending rates by 10%.
"The new prison will have to perform 10% better than our public prisons and there are financial incentives as a reward and penalties if the targets aren't met."
She says this will lead to innovation and improved ways of working.
Ms Tolley says even with the prison population forecast to fall, there is a need for a new prison in Auckland to meet population projections.
Finance Minister Bill English says getting private companies to build and operate the prison will be 10% cheaper than the public sector alternative.