Transport Secretary Philip Hammond has confirmed funding for the link road that will ease congestion and boost economy in the region.
The project is one of nine transport schemes given the go-ahead on Friday after £45.5m of savings were identified by the government.
A bypass to the north of Lancaster will connect Heysham to the M6 motorway and is supported by £110.9m of funding from the Department for Transport towards a total cost of £123.3m.
Lancashire County Council will provide the remainder of the scheme cost.
Plans to build the link road were given the go-ahead last October. The scheme will reduce congestion in Lancaster and improve road safety and the environment in the city as well as allowing for the introduction of improved public transport.
The Department for Transport announced in October that it was seeking best and final offers from local authorities for 10 schemes which it was prepared in principle to support.
Following this, local authorities found overall cost savings of 14%. The schemes are worth over £365m with an overall Department for Transport contribution of £275m.
Hammond said: "The Government is committed to delivering transport projects which improve journeys while also helping economic growth.
"Following the spending review we challenged local authorities to look again at the cost of proposed schemes to ensure we get maximum value for every pound we spend. The councils being awarded funding today have met that challenge by achieving a saving to the taxpayer of £45.5m on the original proposed costs."