Moore used the story as a means to reflect contemporary anxieties and to critique the superhero concept. Watchmen depicts an alternate history where superheroes emerged in the 1940s and 1960s, helping the United States to win the Vietnam War. The country is edging closer to a nuclear war with the Soviet Union, freelance costumed vigilantes have been outlawed and most costumed superheroes are in retirement or working for the government. The story focuses on the personal development and struggles of the protagonists as an investigation into the murder of a government sponsored superhero pulls them out of retirement, and eventually leads them to confront a plot to stave off nuclear war by killing millions of people.

Creatively, the focus of Watchmen is on its structure. Gibbons used a nine-panel grid layout throughout the series and added recurring symbols such as a blood-stained smiley. All but the last issue feature supplemental fictional documents that add to the series' backstory, and the narrative is intertwined with that of another story, a fictional pirate comic titled Tales of the Black Freighter, which one of the characters reads. Structured as a nonlinear narrative, the story skips through space, time and plot. Watchmen has received critical acclaim both in the comics and mainstream press, and is regarded by critics as a seminal text of the comics medium. After a number of attempts to adapt the series into a feature film, director Zack Snyder's Watchmen was released in 2009.

"I suppose I was just thinking, 'That'd be a good way to start a comic book: have a famous super-hero found dead.' As the mystery unraveled, we would be led deeper and deeper into the real heart of this super-hero's world, and show a reality that was very different to the general public image of the super-hero."

In 1985, DC Comics acquired a line of characters from Charlton Comics. During that period, writer Alan Moore contemplated writing a story featuring an unused line of superheroes that he could revamp, as he had done in his Miracleman series in the early 1980s. Moore reasoned that MLJ Comics' Mighty Crusaders might be available for such a project, so he devised a murder mystery plot which would begin with the discovery of the body of The Shield in a harbor. The writer felt it did not matter which set of characters he ultimately used, as long as readers recognized them "so it would have the shock and surprise value when you saw what the reality of these characters was". Moore used this premise and crafted a proposal featuring the Charlton characters titled Who Killed the Peacemaker, and submitted the unsolicited proposal to DC managing editor Dick Giordano. Giordano was receptive to the proposal, but the editor opposed the idea of using the Charlton characters for the story. Moore said, "DC realized their expensive characters would end up either dead or dysfunctional." Instead, Giordano persuaded Moore to rework his pitch to feature original characters. Moore had initially believed that original characters would not provide emotional resonance for the readers, but later changed his mind. He said, "Eventually, I realized that if I wrote the substitute characters well enough, so that they seemed familiar in certain ways, certain aspects of them brought back a kind of generic super-hero resonance or familiarity to the reader, then it might work."

Artist Dave Gibbons, who had collaborated with Moore on previous projects, heard the writer was working on a limited series treatment. The artist said he wanted to be involved, so Moore sent him the story outline. Gibbons told Giordano he wanted to draw the series Moore proposed and Moore approved. Gibbons brought colorist John Higgins onto the project because he liked his "unusual" style; Higgins lived near the artist, which allowed the two to "discuss [the art] and have some kind of human contact rather than just sending it across the ocean". Len Wein joined the project as its editor, while Giordano stayed on to oversee it. Both Wein and Giordano stood back and "got out of their way"; Giordano remarked later, "Who copyedits Alan Moore, for God's sake?"

After receiving the go-ahead to work on the project, Moore and Gibbons spent a day at the latter's house creating characters, crafting details for the story's milieu and discussing influences. The pair was particularly influenced by a Mad parody of Superman named "Superduperman"; Moore said, "We wanted to take Superduperman 180 degrees—dramatic, instead of comedic". Moore and Gibbons conceived of a story that would take "familiar old-fashioned superheroes into a completely new realm"; the writer said his intention was to create "a superhero Moby Dick; something that had that sort of weight, that sort of density". The writer came up with the character names and descriptions, but left the specifics of how they looked to Gibbons. Gibbons did not sit down and design the characters deliberately, but rather "did it at odd times ... spend[ing] maybe two or three weeks just doing sketches." Gibbons designed his characters to make them easy to draw; Rorschach was his favorite to draw because "you just have to draw a hat. If you can draw a hat, then you’ve drawn Rorschach, you just draw kind of a shape for his face and put some black blobs on it and you’re done."

Moore began writing the series very early on, hoping to avoid publication delays such as those faced by the DC limited series Camelot 3000. When writing the script for the first issue, Moore said he realized "I only had enough plot for six issues. We were contracted for 12!" His solution was to alternate issues that dealt with the overall plot of the series with origin issues for the characters. Moore wrote very detailed scripts for Gibbons to work from. Gibbons recalled that "[t]he script for the first issue of Watchmen was, I think, 101 pages of typescript—single-spaced—with no gaps between the individual panel descriptions or, indeed, even between the pages." Upon receiving the scripts, the artist had to number each page "in case I drop them on the floor, because it would take me two days to put them back in the right order", and used a highlighter pen to single out lettering and shot descriptions; he remarked, "It takes quite a bit of organizing before you can actually put pen to paper." Despite Moore's detailed scripts, his panel descriptions would often end with the note "If that doesn’t work for you, do what works best"; Gibbons nevertheless worked to Moore's instructions. Gibbons had a great deal of autonomy in developing the visual look of Watchmen, and frequently inserted background details that Moore admitted he did not notice until later. Moore occasionally contacted fellow comics writer Neil Gaiman for answers to research questions and for quotes to include in issues.

Despite his intentions, Moore admitted in November 1986 that there were likely to be delays, stating that he was, with issue #5 on the stands, still writing issue nine. Gibbons mentioned that a major factor in the delays was the "piecemeal way" in which he received Moore's scripts. Gibbons said the team's pace slowed around the fourth issue; from that point onwards the two undertook their work "just several pages at a time. I'll get three pages of script from Alan and draw it and then toward the end, call him up and say, 'Feed me!' And he'll send another two or three pages or maybe one page or sometimes six pages." As the creators began to hit deadlines, Moore would hire a taxi driver to drive 50 miles and deliver scripts to Gibbons. On later issues the artist had his wife and son draw panel grids on pages to help save time. Moore even shortened one of Ozymandias' narrations, because Gibbons was unable to compress the dialogue on to one page where Ozymandias prevents a sneak attack by Rorschach.

Near the end of the project, Moore realized that the story bore some similarity to "The Architects of Fear", an episode of The Outer Limits television series. The writer and Wein argued over changing the ending; Moore won, but acknowledged the episode by referencing it in the series' last issue.

Watchmen is set in an alternate reality which closely mirrors the contemporary world of the 1980s. The primary difference is the presence of superheroes. The point of divergence occurs in the year 1938. Their existence in this iteration of America is shown to have dramatically affected and altered the outcomes of real-world events such as the Vietnam War and the presidency of Richard Nixon. In keeping with the realism of the series, although the costumed crimefighters of Watchmen are commonly called "superheroes", the only character who possesses obvious superhuman powers is Doctor Manhattan. The existence of Doctor Manhattan has given the U.S. a strategic advantage over the Soviet Union, which has increased tensions between the two nations. Eventually, superheroes grow unpopular among the police and the public, which has led to the passage of legislation in 1977 to outlaw them. While many of the heroes retired, Doctor Manhattan and The Comedian operate as government-sanctioned agents, and Rorschach continues to operate outside the law.