Plans for a £117m incinerator were turned down
Cornwall Council is considering plans for a smaller incinerator to avoid paying £30m to a waste disposal firm.
Sita was awarded a 30-year contract in July 2006 to manage the county's waste.
Its plans included an incinerator in St Dennis, but the former county council turned down the planning application for the plant in March.
Sita said it would have to be paid for work already completed if the contract was cancelled. Cornwall Council said a smaller plant could avoid that.
Sita's plans in the £500m contract included the building of the £117m incinerator. It submitted its planning application after it was awarded the contract.
The-then county council rejected the incinerator proposals despite planning officials advising the authority to grant the application.
Sita said 200,000 tonnes of non-recyclable waste produced in Cornwall every year would be burned to generate enough electricity to power 21,000 homes, if the plant was built.
However, there was widespread opposition to the proposed plant, with hundreds of local people signing a petition against it.
Residents claimed the plant was too big, poorly located and could pose health risks.
Sita has appealed against the planning decision. A final decision on the plant will be made by government ministers next March.
Cornwall Council said its contract with Sita stated that if work had not started by the end of March it had the right to terminate the whole £500m contract through a "force majeure" - or "no fault" mechanism - or seek a revised project plan.
Sita has told the council it will be unable to start the work by the end of March because of the inquiry.
But it said if the council terminated its contract, it would have to pay for facilities it had already provided.
They include recycling centres and design work on the incinerator, totalling an estimated £30m.
The council said it was "working hard to find appropriate ways to deal with Cornwall's waste" and still needed to decide whether to do this or to ask for a revised project plan.
It said its waste panel was looking at alternative ways of dealing with the county's waste, but added it was also considering a smaller incinerator which could be built within the scope of the Sita contract.
In a statement, Sita said it was awaiting further instruction from the council and "in the meantime, are progressing with work for our appeal".