A new inquiry into David Bain's bid for compensation will cost a further $400,000, Justice Minister Amy Adams says.
Ms Adams today announced that the Government had decided to hold a fresh inquiry into Mr Bain's application.
She said Cabinet did not have the information it needed to reasonably reach a decision.
David Bain spent 13 years in prison after being found guilty of murdering his mother, father and three siblings in 1994 but was found not guilty at a retrial in 2009.
In a report released in late 2012, former Canadian Supreme Court judge Ian Binnie concluded that Mr Bain was innocent and suggested he should receive compensation.
However, the then-Justice Minister Judith Collins then sought a peer review of that report, carried out by Robert Fisher QC, which criticised the findings as legally flawed.
Ms Adams said, despite the further delay and cost, a new inquiry was the best approach to progress Mr Bain's claim on a proper and robust basis.
"My preference would be that we weren't in this position, but this is where I am, I cannot make a decision based on what is in front of us."
She said the advice of both of the previous reports - which together cost $606,000 - would be set aside and a new person would be appointed to conduct the fresh inquiry.
"The New Zealand public rightly expects the Government to make a decision with the full set of facts and reliable advice in front of them," Ms Adams said.
"A fresh look will safeguard the integrity of the process and reassure the public that Cabinet will act on the best advice available."
She stressed it did not matter what conclusion the new inquiry came to, so long as it was reliable.
Mr Bain's claim for compensation falls outside existing Cabinet guidelines because when his conviction was quashed, a retrial was ordered. However, Cabinet has also reserved residual discretion to consider claims outside the guidelines in "extraordinary circumstances … where this is in the interests of justice".
'It's unfair to the taxpayer'
The Labour Party said it was disappointing that more than half a million dollars had been spent by the Government on considering the matter and it was still not resolved.
The party's justice spokesperson Jacinda Ardern said she accepted that the job needed to be well done but too much money had been wasted on the process so far.
One long-time supporter of David Bain said there was no need for another report.
Joe Karam said the evidence of the 42-year-old's innocence was overwhelming
"It's unfair to the taxpayer, having to fork out another whole lot of money for something that's already been done - but, then, the minister has to decide how to proceed and this is what she's decided."
Mr Karam said, however, the new inquiry would remove controversy from the Cabinet's decision on compensation.
He said it was hard to imagine there would be a queue of people lining up to take on the new inquiry.
"The case has taken on such a flavour now since the Collins fiasco, if I can call it that, that I can't see how anybody who has ever heard of the case could properly adjudicate on it."
He said the Bain camp would not be consulted on who conducted the inquiry but he doubted anyone from New Zealand could do it.
Ms Adams will now seek advice on an appropriate inquirer and develop the inquirer's terms of reference, with a view to having a report to Cabinet by the end of the year.