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This paper extends Banerjee and Duflo's software offshoring model to an incentive-compatible framework and use it to restructure payment contracting in order to control offshoring risk more effectively. We propose a two-stage payments contracting with an embedded milestone-inspection trigger option. The vendor can only get the second-stage payment given her first-stage work satisfies certain criteria set by the client at the inspection point. We model such trigger option using an indicator function method and show that the embedded trigger option improves offshoring-risk mitigation and makes the vendor work harder. Furthermore, embedded trigger option imposes constraints on and thus improve on the client's behavior by changing the share ratio of the overrun for the client. Empirical evidence from the survey data of the China's vendors for the Japanese clients strongly supports main results of our model. Particularly, evidence supports that trigger option helps risk mitigation mainly by improving vendor's overrun reduction efficiency and is a bilateral incentive mechanism for both the client and the vendor. [ABSTRACT FROM AUTHOR]