A water heater construction including an inner water tank surrounded in spaced apart relationship by an outer shell. A control apparatus, such as a thermostat, is located at the exterior wall surface of the inner tank, and the outer shell has an aperture in alignment with the control apparatus. A collar is located around the control apparatus and is compressed between the inner tank and outer shell. The space between the inner tank and outer shell is filled with a foamed insulation material. The water heater is manufactured by first positioning the collar about the periphery of the control device in abutment with the exterior surface of the inner tank. Next the outer shell is positioned over the inner tank with a concentric space between the inner tank and outer shell, and with the interior surface of the outer shell in abutment with the collar compressing the collar between the inner tank and outer shell. Expandable foam is disposed in the space between the tank and shell and allowed to foam in situ. The collar is fabricated of a thermal insulating material and has a centrally located opening with a peripheral configuration matching that of the control apparatus and sized to fit therearound.