<p>Engineering waste mud, primarily produced during the construction of bored piles and slurry shield tunneling, represents a challenging type of construction waste to treat. Additionally, the disposal of industrial by-products also presents significant challenges. In this study, a sustainable solution is proposed by utilizing industrial by-product lignocellulosic fibers as reinforcement materials in geotechnical engineering, complemented by an eco-friendly hydrophobic polymer to treat the waste mud. The impact of additive content on mechanical properties was assessed through unconfined compressive strength (UCS) tests. The reinforcement mechanism was elucidated through microstructural observation tests, including scanning electron microscopy (SEM), X-ray diffraction (XRD), and mercury intrusion porosimetry (MIP). The results show that composite soil additive effectively improves the UCS of the engineering waste mud. The strength of the reinforced mud samples increases with the additive content and curing age, and the optimum dosages were found to be 4% lignocellulosic fiber and 4% hydrophobic polymer, enhancing the 28-day UCS of the treated mud by 347.9% relative to untreated mud. MIP and SEM results suggest that the strength improvement can be attributed to a reduction in total volume of pores and the reinforcing and toughening effects of lignocellulosic fiber. The strength gains over time are primarily attributed to the hydrophobic polymer rather than lignocellulosic fiber. In conclusion, the waste mud reinforced with by-product lignocellulosic fiber and hydrophobic polymer represents a win–win solution that simultaneously improves soil strength and recycles industrial waste.</p>