The province says it will set aside $29 million for the agreement.
About 150 former residents of the orphanage allege they were sexually, physically and psychologically abused by staff over a 50-year period, to 1990.
The deal will be reviewed in Nova Scotia Supreme Court for preliminary approval on Friday.
Last December, Judge Arthur LeBlanc certified the lawsuit against the province for failing to provide for children in its care.
In his 94-page decision last December, LeBlanc said wards of the province who were placed in the care of the home from 1951 to 1990 had a clear right to sue for negligence. However, others placed in the orphanage by relatives or children's aid societies may have to argue further to be included in the class action.
Premier Stephen McNeil says Tuesday's tentative agreement is a significant step forward moving closer to a resolution.
The government says all legal steps are expected to be finalized by the end of September.
"We're not done yet. There are still some legal steps in the process. But this is a significant step forward in the right direction," said McNeil in a release.
"Former residents have been through a lot and for their sake, it's good that we're closer to a resolution."
In November, McNeil announced his government would try to settle the suit — something his New Democratic Party predecessor fought in the courts before being defeated in October's provincial election.
The allegations in the class action have not been tested in court, and previously, lawyers for the government had argued that some of them are based on speculation or hearsay.