The 83-bedroom Shankly Hotel in the former Liverpool City Council building in Victoria Street will display 70 pieces from his family's collection.
It is expected to be completed in August, creating more than 200 jobs.
Chris Shankly-Carline said it will be "the ultimate tribute to his grandfather".
The museum will feature items from Shankly's time as Liverpool manager and also from his playing days with Carlisle United and Preston North End.
Bill Shankly's grandson Chris Shankly-Carline holding the This is Your Life book and the key to the Shankly Gates with developer Lawrence KenwrightPieces include the key to the Shankly Gates (pictured), presented to the family in 1982 and Nasa badges given to him by Buzz Aldrin and Neil Armstrong when they visited Anfield in the 1970s.
Mr Shankly-Carline said: "[We] have identified some truly unique, unseen pieces of memorabilia from within the family collection to display."
Shankly took over as Liverpool manager in 1959. He is credited with taking the club from the second tier of English football and turning it into a major force in Europe.
Under Shankly, Liverpool won the First Division title in 1964, 1966 and 1973, won the FA Cup in 1965 for the first time in the club's history and the Uefa Cup in 1973.
He retired in 1974 after winning the FA Cup for a second time.
After his death in 1981, Liverpool erected the Shankly Gates at the stadium and a seven-foot bronze statue of Shankly was unveiled outside the Kop in 1997.
The hotel is being developed in conjunction with his family and Signature Living.
Chris Carline and Lawrence Kenwright (right) outside what will be the new Shankly hotel on Victoria street, Liverpool.Work is set to begin on Liverpool’s new Shankly-themed hotel next month with bosses announcing February 1 as the start date for the project.
Builders are preparing to transform the former Liverpool council offices in Millennium House into a hotel based on the Reds hero.
Part of the project has already seen the £850,000 overhaul of the Lifestyles gym on Victoria Street that forms part of the site.
Signature Living, the company behind the hotel project, will take over the building at the end of January as council staff move over to the Cunard Building.
The complex is expected to have 61 hotel rooms and 22 serviced apartments and officials behind the Shankly Hotel hope it will become a major tourist attraction once complete as fans from around the world visit to celebrate the famous LFC manager.
The Shankly Hotel development is thought to be worth around £15m and Signature Living hope it will be open by August - around the start of 2015/2016 football season.
The company is behind several developments in the city, including 30 James Street, and their plans will also see the creation of a training school on the site for people wanting to go into the leisure and hospitality industries.
Announcing the start date for work Signature Living said: “The Shankly Hotel is delighted to announce work will commence on 1st February, 2015, to transform Millennium House into a hotel based on the late, great Bill Shankly.
“The Shankly Hotel will offer more than just accommodation; it is set to become a major tourist attraction in Liverpool, which will ultimately promote the city as an amazing destination in the UK.
"Shankly Hotel is part of the Signature Living group, and the new development will follow in the footsteps of 30 James Street, a new Titanic Hotel based along Liverpool’s waterfront.
“The hotel will undoubtedly garner a lot of attraction from people across the world due to the legacy Bill Shankly left behind.
"It won’t just be a hotel for fans of Liverpool football club, who Shankly helped pull out from Second Division to become Division One winners, but will celebrate the passion, determination of William Shankly – who is one of football’s greatest ever football managers.”
Could be a nice place to stay if your're an out of towner.
It will be very interesting to see the tariffs.
