Upon his arrival in the Colony of New South Wales at the beginning of 1810, Governor Macquarie discovered that Sydney Cove's hospital was an affair of tents and temporary buildings. Macquarie set aside land on the western edge of the Government Domain for a new hospital and created a new road – Macquarie Street – to provide access to it.
Plans were drawn up but the British Government refused to provide funds to build the hospital. Consequently, Macquarie entered into a contract with a consortium of businessmen–Garnham Blaxcell, Alexander Riley and, later, D'Arcy Wentworth–to erect the new hospital.
They were to receive convict labour and supplies and a monopoly on rum imports from which they expected to recoup the cost of the building and gain considerable profits. The contract allowed them to import 45,000 (later increased to 60,000) gallons of rum to sell to colonists. Convict patients were transferred to Governor Macquarie's new hospital in 1816.
As the hospital was nearing completion in 1815, the now famous convict architect Francis Greenway was asked to report on the quality of the work. He condemned it, claiming that it "must soon fall into ruin". Short-cuts had been taken with the construction and there were weak joints in the structural beams, rotting stonework, feeble foundations, and dry rot in the timbers.
Macquarie ordered the contractors to remedy these defects but by 1820 the southern wing was deemed particularly unsafe, with reports that some of it had collapsed and had to be rebuilt. Around this time, Greenway was commissioned to undertake repairs to both the wings of the hospital, including alterations to the roof of the southern wing and the rearrangement of its internal spaces. Many defects present from the original construction remained hidden away until the extensive restoration of the 1980s.