More than 4,600 families are set to be displaced from 1,600 acres.
The national government has announced plans to build a Sh35 billion dam in the county.
The Mwache Dam is expected to supply the region with irrigation water besides generating power.
The project, which will take four years to complete, will require 1,600 acres and displace more than 4,600 families.
Officials say it will only be launched once the families have been resettled and compensated.
Water and Irrigation Cabinet Secretary Eugene Wamalwa on Saturday handed a Sh150 million cheque to National Land Commission (NLC) chairman Muhammad Swazuri at Fulugani Primary School in Kinango to start the valuation of land, houses and crops for the affected families.
Mr Wamalwa said the commission would get an additional Sh200 million next month to ensure that the valuation was completed without delay.
"The Government will give NLC a total of Sh350 million to carry out valuation of land, houses and crops, and also begin compensation for the affected families," he said. "The dam is one of the flagship projects under Vision 2030."
Apart from the main dam, the Government will also build small reservoirs in Nunguni and Pemba on Mwache River as well as a water treatment plant to ensure the highest quality before it is pumped to Mombasa and Kwale counties.
Mombasa's daily demand for water stands at 160 million litres against a supply of 48 million litres from neighbouring Kilifi, Kwale and Taita Taveta counties.
Mwache Dam will be an 87.5 meter-tall concrete gravity dyke, holding 118 million cubic metres of water.
Coast Development Authority (CDA), which initiated the project, will plant trees in the catchment area to prevent siltation and ensure sustainability.
Present at the ceremony to kick-start the valuation were Kinango MP Gonzi Rai, Kwale Woman Representative Zainab Chidzuga, Taita Taveta Woman Rep Joyce Lay, Constituency Development Authority (CFA) chairman Ibrahim Khamis and Managing Director Mohamed Keinan.
Prof Swazuri assured residents that the commission would carry proper valuations to ensure adequate compensation.
"The commission is going to start work immediately and ensure that all affected persons are compensated. All family members should be involved in the payment process to ensure that the funds are well spent," he said.
He denied that the commission could not account for some of the funds set aside to compensate residents whose land was taken up by the Standard Gauge Railway (SGR), saying all the money forwarded by the Government went to the true beneficiaries.
"I want to also clarify that the Sh327 billion cost for the SGR was justified because the quotations made in 2009 could not be the same in 2016. There were also costs for acquiring wagons, training personnel and operating the service. The claim that SGR funds were stolen is a ploy to discredit the Government," Swazuri said.
Mr Rai and Ms Chidzuga asked the Government to ensure that locals were given priority in employment and tenders for the project.
"I am calling for adequate and prompt compensation of those affected and also for locals to be given priority in employment," said Rai.
According to Wamalwa, the multi-purpose dam is one of the largest projects in the country and will provide 186 million litres of water to Mombasa and Kwale counties daily.
The water will be used for hydro-power production and put hundreds of hectares under irrigation to address famine and water shortages in the area.
The CS said the national government was working closely with the two county governments as well as the World Bank to ensure that the project was completed on schedule.
Wamalwa claimed there was a plan by the Opposition to cancel financing agreements signed by the Jubilee government with various donors once it took power.
"I am appealing to Kenyans to re-elect President Uhuru Kenyatta for continuity of projects," he said.