Norfolk County Council was last year criticised for appointing Trowse firm May Gurney to carry out the controversial £106m northern bypass for Norwich without consultation or tender.
However, the deal is to be scrapped after lawyers at the Department for Transport warned the decision was legally unsound and the contract should first go to tender.
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Councillors will now be asked to launch a tender process for the Northern Distributor Road (NDR) in a move that many fear could delay the project by up to two years and result in increased costs.
Despite still being able to bid for the final tender, May Gurney has said it is "frustrated" by the governments stance.
Ian Findlater, group business development director, said: "We share Norfolk County Council's frustration about this but are keen to take part in the tender process in due course.
"It's a shame that the DfT's position will delay the NDR by up to two years and undoubtedly end up increasing the cost of this badly needed project."
The NDR bypass will link the A47 at Postwick to the A1067 Fakenham Road in the north of the city and is seen by supporters as key to tackling congestion ahead of the delivery of thousands of proposed new jobs and homes in the area.
(NS/JM)
