I thought the other day that Oblivion would make a great RTS for building up a village like Settlers or creating a dungeon like Dungeon Keeper.

Has anyone done something like this yet?

There was one person working on a mod like that. Complete with the ability to torture prisoners.. However, this was long ago, cannot recall the name of it, perhaps try the mod physics thread? Not sure if the mod ever made it to release.

Yeah actually I just found it on TesNexus. It's still in Beta but not really what I was looking for.

I was thinking more of the actual building of a dungeon using resource gathering and stuff. Or building your own farm/town by employing people and doing resource management and defending from enemy attacks.

aaah Kvatch rebuilt or another of the kvatch mods might work for you. If I recall right you get quests to build things and hire guards. I don't believe there is a mod that allows you to do the actual building, all of it is handled through quests.

In fallout I know there is a mod, that allows you to build a town from scratch, at any point of your choosing, I don't think the equivalent exists for oblivion.