In 1998 the South African government adopted water legislation that provides a new constitutional framework for water management. Economic efficiency, social equity, and environmental sustainability are the guiding criteria of the new South African water policy. Water management will be implemented through decentralized institutions (Catchment Management Agencies and Committees, Water Users Associations). These institutions will be in charge of local negotiations and the decision-making processes regarding resource allocation among stakeholders. The new water management institutions have the complex context characterized by inequalities, lack or asymmetry of information, and conflicting interests. Hence, a clear need for negotiation and decision support tools for these institutions is perceived. An action research project was initiated at the University of Pretoria in 2001. It has the main objective of supporting the sustainable establishment of decentralized water management institutions as negotiation and decision-making entities on water resource management at basin level. This paper describes and discusses the participatory approach, aimed at developing a negotiation support tool called Action-research and Watershed Analyses for Resource and Economic sustainability (AWARE). More precisely, the phases of development of the model in close collaboration with DWAF officers are analysed. The choice of involving different stakeholders at different stages of the process, and its possible consequences on the nature of the tool is discussed.