Sydney—The A$660m (US$562m; £342m) scheme is designed to address chronic housing problems in Aboriginal communities.
The project aims to construct 750 homes in the Northern Territory and refurbish hundreds of others.
Officials blamed "administration problems" for the delays - which prompted one minister to quit.
The slow pace of this ambitious programme to help Aboriginal families almost brought down the Northern Territory government when a former minister quit in disgust at the lack of progress.
A review has recommended that federal agencies take more control of the scheme and that administration costs be reduced.
It has all been an embarrassment to the government of Kevin Rudd in Canberra and his indigenous affairs minister, Jenny Macklin, who has insisted that the building work will be completed within budget and on time by 2013.
Critics, though, are not convinced.
Nigel Scullion, a conservative senator for the Northern Territory, says the whole affair has been a disaster.
"The minister has taken absolutely no responsibility for this.
"This was a fundamental of Kevin Rudd`s undertaking and promises to indigenous people of Australia and he has failed and it has failed under the leadership of Jenny Macklin.
"And I cannot understand why Mr Rudd would allow her to stay and preside over the second stage of this complete and unmitigated disaster.
"Our First Australians deserve better than a cubby house or a dog house."
The delays mean that the amount of money earmarked for each new dwelling has been cut by 20%.
For generations, poor housing has blighted many Aboriginal communities.
Australia`s original inhabitants often suffer squalid and over-cramped living conditions which contribute to the 17-year gap in life expectancy between them and their non-indigenous counterparts.