The Welsh region also announced a fresh two-year deal for their backs coach Gruff Rees.
Tandy was appointed 15 months ago and led the Ospreys to last season's RaboDirect PRO12 title.
"Steve and Gruff are two of the brightest, most exciting young coaches around," Ospreys chief operations officer Andrew Hore said.
"They have already developed excellent reputations as innovative, forward thinkers and have both worked extremely hard to help put foundations in place over the last 15 months to help ensure a sustainable, long-term future for the region."
Tandy added: "We've got a great base to work from, with an experienced core of real quality international players and British Lions, and some outstanding young talent that has come to the fore over the course of this season.
"With another year of experience under their belts, the potential of this group for next season and beyond is exciting."
- Sports & Recreation
- Andrew Hore