The deal comes one day after the Bengals signed head coach Marvin Lewis to a two-year contract.
"We have a lot of talent on this roster and I am excited for the opportunity to build the high-powered offense we have the potential to be," Lazor said in a statement. "This offseason will give us the chance to continue the success we had at the end of the year as we develop into a dynamic offense in 2018."
Lazor was promoted from quarterbacks coach to offensive coordinator in September, replacing the fired Ken Zampese after the team failed to score a touchdown through the first two games of the season.
The Bengals showed a modest improvement under the 45-year-old Lazor's watch, but still finished 32nd in the NFL in yards per game and 26th in points.
"He's very comfortable with how I see it," Lewis said of Lazor on Tuesday. "We basically wasted the 2,000 snaps of OTAs and training camp because it was through another man's eyes. When Bill took over, Bill was able to try and work through things that had been already done without trying to slow our players down. He tried to work in the constraints of the way things were and the things that had been installed."
Lazor completed his second season with Cincinnati after spending two years as the Miami Dolphins offensive coordinator. He also served as an offensive coordinator and/or quarterbacks coach for the Washington Redskins, Seattle Seahawks and Philadelphia Eagles.