David Bain's legal team has proposed a financial settlement which it says would have cost the taxpayer much less than an estimated $10 million fight for compensation.
However, this was rejected by the Government, said Mr Bain's lawyer, Michael Reed, QC.
Justice Minister Simon Power said there were no short cuts in the process of seeking compensation for wrongful imprisonment.
Mr Bain - who was last year found not guilty of the 1994 murder of his parents and three siblings after spending 13 years in prison - will seek legal aid to fund his compensation bid.
His chance of success in such a bid will be one of the factors considered by the Legal Services Agency, which administers legal aid.
Mr Bain's defence at his High Court retrial last year cost the taxpayer more than $2 million.
Mr Reed told the Herald that Mr Power had informed the Bain camp that it had to prove that "on the balance of probabilities" Mr Bain was innocent.
Because Mr Bain did not have his murder convictions quashed on appeal without order of retrial, and was not given a free pardon, he must also show his compensation bid meets the standard of "extraordinary circumstances".
"This is going to involve a huge case, which in our estimation may end up costing everyone about $10 million, with an overseas judge to be appointed," Mr Reed said.
"We have offered a short cut, but that has been rejected. The short cut is that we talk to the Government about a negotiated settlement, because we are concerned that the cost of proving David's innocence - which we are quite confident we can do - is going to be much greater than the amount of any compensation we would be claiming."
Mr Power said there were no short cuts available in the Cabinet guidelines.
"There's a process in place and we're working through it at the moment. This will take time."
Mr Reed would not discuss how much compensation would be sought, but it is expected to be more than $1 million.
The compensation bid would involve "presumably, recalling about a couple of hundred witnesses and experts from all around the world", Mr Reed said.
"Which seems not an economic thing to do, bearing in mind the state of the economy generally. In the public interest, I would have thought it would be better to negotiate with David, to give him some money and to allow him to get on with his life. As it is, he's in limbo."
Mr Bain's lawyers also plan to pursue an inheritance from Mr Bain's parents which went to other family members when Mr Bain was convicted of the five murders in 1995.