It is outside of him. The blessing states that our handiwork should become a part of us. When a person does a mitzvah, it becomes fixed in his soul. It becomes a part of his character and is with him forever. Lastly, we are blessed that Hashem should make all of our handiwork a permanent part of us.
People build all sorts of things.
Some have hobbies building model cars, boats or planes. Some people build buildings. Some exercise to build up their bodies. The blessing of Moshe and Aharon tells us to build up our souls by doing mitzvos properly. Soul building is important for two reasons.