It will be funded by the European Union.
The by-pass will include a bridge, and will start from the Coca-Cola plant on Masaka Road.
It will pass through Rwebishuri, Nkokonjeru and join Kabale Road at Katatumba Resort, about five kilometres from the town centre.
The by-pass falls under the Northern Corridor route which gives Uganda vital access to the sea and connects the country to the Great Lakes region and Southern Sudan.
Alinange revealed that the pre-qualification process for firms that will work on the project had already started.
Work starts in October.
A few weeks ago, the Government signed a multi-billion shilling financing agreement with the European Union for the project.
The Government will contribute 45m euros (about sh124b). Over 122m euros (about sh335b) will come from the EU.
This will make the biggest project in Uganda to be funded by the EU.
Mbarara gets sh459b bypass