The Dunkirk Little Ships Restoration Trust (DLSRT) has been awarded over £900,000 by the Heritage Lottery Fund (HLF).
Jerry Lewis, who chairs the Dunkirk Little Ships Restoration Trust (DLSRT), said a new boiler will be installed, the steam plant will be restored and the electronic navigation equipment will get an update.
"Without the invaluable assistance of the HLF it was likely that, despite the heroic efforts of our volunteers, Challenge would have continued to deteriorate to a point where further restoration would have been impossible," he said.
It is hoped the tug will be restored in time for the 75th anniversary of Operation Dynamo in 2015.