The system is worth 14.9 billion Kenyan shillings (165.2 million US dollars).
The project was given the go-ahead by a parliamentary committee on administration and national security in July, which cited last September's attack on the Westgate shopping mall in Nairobi and attacks on the coast in recent months as reasons to improve surveillance and security nationally.
The awarding of the contract to Safaricom, which is 40 per cent owned by Britain's Vodafone, had sparked a row when critics complained that it had been awarded without an open bidding process.
(READ MORE: Vodafone at risk of losing Safaricom in AT&T potential buyout)
Under the terms of the contract, Safaricom will install and run a communication and surveillance system that is linked to police stations to help combat crime, initially operating in Nairobi and Kenya's second-largest city, Mombasa.
The two cities have borne the brunt of a spate of gun and grenade attacks in the past year, blamed by the government on Somalia's Islamist al-Shabaab militants. Al-Shabaab claimed responsibility for the most recent attack on Saturday, when 28 people were shot dead near the Somali border.
(READ MORE: Kenyan troops kill over 100 al-Shabaab militants after bus attack)
Interior minister Joseph ole Lenku said the surveillance project would provide security agents with the capability to monitor and deter crime.
Bob Collymore, Safaricom's chief executive officer, said the project would take 18 months to construct.