The conception and preparation of Penghu Living Museum traces back to the 2nd extra session of the 14th Penghu County Council Meeting in 1998 when Councilor Hu Chun-Chieh brought up a motion to suggest the County Government to plan and establish a county-level general museum in Penghu. In order to propel the proposal, Penghu County Government's Cultural Center promptly incorporated the project into Penghu County Government's 4-year general development roadmap (spanning 1999-2002) as a major governmental construction project. Fund raising efforts commenced in 1999 and marked the initiation of the "Penghu Living Museum" project.

In 1999, Penghu County Government convened the 2nd advisory forum for the establishment of Penghu Living Museum for discussions on the orientation of development for the museum. The forum concluded with resolution to tentatively name the project as "Penghu Fishery Museum".

In April 2000, Penghu County Government adopted the concepts of an ecological museum as the basis for the project to highlight the museum's characteristics as a dynamic, living, simple yet friendly establishment that offers a comprehensive overview of Penghu's customs and local residents' lifestyles. And as such, "Penghu General Museum" became "Penghu Living Museum". Adopting concepts of new museology on the ecological/community museum as the orientation for planning, Penghu Living Museum featured "Penghu folks" as the body of exhibit contents. And as such, instead of focusing on "ecology" that emphasized more on "objects", the museum has presented the "lifestyle" of Penghu from the perspective of "people". Incorporating the cultural philosophy of "Lifestyle as Culture and Culture as Lifestyle", Penghu Living Museum is an island museum that centers on Penghu residents.

Towards the end of 2001, Penghu County Government commissioned Dr. Chiang Shao-Yin from the Center for Traditional Arts (Taipei National University of the Arts) to conduct the preparatory study on "Penghu Living Museum survey research and preparatory planning". After roughly a year's time, Dr. Chiang completed the "Penghu Living Museum Survey Research & Preparation Plan Report" and Siwun Barracks was chosen as the designated site for the museum. The report became the basis of the museum's preparation and development. In 2003, Penghu County Government promptly planned the relevant budget for the design, planning and construction for the museum and commenced the actual construction. After an open selection for the design and demonstration for the main building of "Penghu Living Museum" in 2003, the bid was won by Lin Hsien-Jui Architects & Associate (a native Penghu resident with his business based in Taiwan proper). The mock building and demo planning design was completed in 2004 while Penghu County Government began raising offshore island development funds and allotted budgets over the years to subcontract relevant construction. The bid for the main construction was won by Ta Mao Construction Co., Ltd.; plumbing construction by Taikun Plumbing Engineering Co., Ltd. and air conditioning by Yi Yang Company. The construction of the main building, along with plumbing, and air conditioning were completed at the end of 2008. The bid for the follow-up demonstration engineering was won by Craftsman International Design Company (based in Taipei) and relevant construction was completed by the end of 2009. The total budget for the entire museum came to approximately NT$ 350 million.

The planning, preparation and construction of Penghu Living Museum spanned over a decade. It is the hard work of both the former and incumbent County Magistrate Mr. Lai Wei-Feng and Wang Chien-Fa, coupled with the commitment from key officials including directors Chang Jui-Tung, Hu Chung-Kai and Tseng Hui-Hsiang along with the effort of everyone at Penghu County Bureau of Culture and assistance from local cultural historians and museum experts that had made the establishment of the museum a reality. Penghu Living Museum was officially inaugurated on April 3, 2010 as the primary establishment in the county to feature relevant exhibits.