Saute onions in bacon fat until soft, drain excess fat from skillet. Add butter and flour, cook until it forms a paste. Slowly add milk and water mixture, cook on med until sauce thickens, add Velveeta and stir off heat until melted.
Spray 9 by 13 dish with cooking spray. Add small amount sauce to bottom of pan. Add layer of potatoes, 1/3 of ham, 1/3 of bacon and cover with 1/4 of sauce and 1/4 of grated cheddar. Repeat layers 2 more times, ending with cheese sauce, cheddar cheese and bacon. Bake at 400 for app 1 hour.