Preheat oven to 400ºF. Add the chopped onion, squash, and water to a skillet over medium heat. Cover and cook for 5 minutes, then drain well and transfer to a mixing bowl.
Mix the cracker crumbs and cheese together in a mixing bowl.
Beat the milk and eggs together in a separate bowl.
Add half of the cracker cheese mixture, the melted butter, and the egg and milk mixture to the squash and toss together. Season with salt and pepper.
Transfer to a 9x9-inch baking dish and add the remaining cracker mixture to the top of the casserole, and dot with 2 tbsp butter.
Bake for 25 minutes, until golden brown.