I like the idea; my oldest kiddo and I did this with his current bike ( built out of a Raleigh C40, with a couple adaptations)
Heck, my first ‘ten-speed’ came in the box from the PX; I spent most of my 12th birthday on the back porch, putting it together.

I’d get the ‘dirty work’ done first, like repacking bearings and truing the wheels before you give it to him; that’s the tedious stuff that will make you loose interest quickly, assembly is the fun part.

if you have enough parts on hand, bring him the ‘kit’ with a couple options; like a choice of knobby tires or ‘slicks’ and maybe a couple or three handlebar shapes to pick from.
Getting a choice in how the final result turns out will definitely increase your nephew’s buy-in on the project.