Cold-rolled sludge (CRS) has become a challenge due to its large volumetric capacity and high toxicity and is difficult to be degraded under natural conditions. This article aims to explore the feasibility of the solvent extraction method for recovering oil and fat from CRS and utilizing it as a raw material to prepare biodiesel with the application of a homogeneous catalyst H2SO4 to mediate esterification and transesterification. The formation mechanism of CRS was proposed with its detailed analysis; hydroxylates were preferentially adsorbed on the metal surface by hydrogen bonds, and free fatty acids were hooked by carbon chains to form a second layer of adsorption. It revealed the reason for the residual oil content on the surface of the extracted solid phase. Experimental data represented an optimum biodiesel yield of 96.5% at a catalyst dosage of 25 wt %, a reaction time of 24 h, a methanol-to-oil molar ratio of 70:1, and a reaction temperature of 60 °C. The main properties of the biodiesel were tested and confirmed to meet ASTM D6751 standards.