The move, which would affect more than 350 county workers, has been approved in principle by councillors following a report from consultant KPMG.
KPMG recommended that North Yorkshire externalise the contracting unit through a trade sale, accompanied by a partnering agreement.
Mike Moore, North Yorkshire's environmental services director, said: 'This is a very successful part of our operation which has in the past made substantial profits for the county council -£750,000 in the last financial year.
The council will consult staff and unions before a further report is considered by members in October. If the move is given final approval, the unit could be privatised by April 2001.