The works will allow buses to jump the queue to turn right from Albany Highway on to Nicholson Road, where investigations have shown eight bus routes face long delays, and cars queue up to 260m in the afternoons.
One straight-through highway lane will become a 24-hour bus-only turning lane just before the lights.
A wider Nicholson Road will continue the bus lane for about 200m.
Chief executive Ian Cowie said there had been other options for the intersection but the bus lane was the highest priority.
The memorandum of understanding allows for regular reviews of the plan’s effectiveness, with a view to keeping options open for future works.
PTA spokeswoman Claire Krol said without steps to improve traffic flow, congestion at the spot would worsen significantly.
She said while stakeholders had considered many options, major infrastructure works would have impacted overall services more than this option, which would make the most of an underused lane.