diff --git a/main/src/main/scala/sbt/ProjectMatrix.scala b/main/src/main/scala/sbt/ProjectMatrix.scala
index ecb44a548..c77ad41f5 100644
--- a/main/src/main/scala/sbt/ProjectMatrix.scala
+++ b/main/src/main/scala/sbt/ProjectMatrix.scala
@@ -366,11 +366,13 @@ object ProjectMatrix {
     private lazy val noScalaLibrary: Seq[Def.Setting[?]] =
       Seq(autoScalaLibrary := false, crossPaths := false)
 
+    // Resolve the matrix base against the build root rather than using getAbsoluteFile,
+    // which resolves against CWD and breaks source dependencies (issue #8971).
     private lazy val baseSettings: Seq[Def.Setting[?]] = Def.settings(
       name := self.id,
-      sourceDirectory := base.getAbsoluteFile / "src",
-      unmanagedBase := base.getAbsoluteFile / "lib",
-      projectMatrixBaseDirectory := base,
+      projectMatrixBaseDirectory := IO.resolve((ThisBuild / baseDirectory).value, base),
+      sourceDirectory := projectMatrixBaseDirectory.value / "src",
+      unmanagedBase := projectMatrixBaseDirectory.value / "lib",
     )
 
     private def rowSettings(r: ProjectRow): Seq[Def.Setting[?]] =
diff --git a/sbt-app/src/sbt-test/project-matrix/full/build.sbt b/sbt-app/src/sbt-test/project-matrix/full/build.sbt
index 9abee4af3..9beae849a 100644
--- a/sbt-app/src/sbt-test/project-matrix/full/build.sbt
+++ b/sbt-app/src/sbt-test/project-matrix/full/build.sbt
@@ -25,7 +25,8 @@ lazy val core = (projectMatrix in file("core"))
   .settings(
     check := {
       assert(moduleName.value == "core", s"moduleName is ${moduleName.value}")
-      assert(projectMatrixBaseDirectory.value == file("core"))
+      assert(projectMatrixBaseDirectory.value == (ThisBuild / baseDirectory).value / "core",
+        s"projectMatrixBaseDirectory is ${projectMatrixBaseDirectory.value}")
       assert(projectID.value.crossVersion == CrossVersion.full, s"crossVersion is ${projectID.value.crossVersion}")
     },
   )
@@ -38,7 +39,8 @@ lazy val intf = (projectMatrix in file("intf"))
   .settings(
     check := {
       assert(moduleName.value == "intf", s"moduleName is ${moduleName.value}")
-      assert(projectMatrixBaseDirectory.value == file("intf"))
+      assert(projectMatrixBaseDirectory.value == (ThisBuild / baseDirectory).value / "intf",
+        s"projectMatrixBaseDirectory is ${projectMatrixBaseDirectory.value}")
     },
   )
   .jvmPlatform(
diff --git a/sbt-app/src/sbt-test/project-matrix/jvm-sandwich/build.sbt b/sbt-app/src/sbt-test/project-matrix/jvm-sandwich/build.sbt
index 7afc5a4a2..472116a7b 100644
--- a/sbt-app/src/sbt-test/project-matrix/jvm-sandwich/build.sbt
+++ b/sbt-app/src/sbt-test/project-matrix/jvm-sandwich/build.sbt
@@ -44,7 +44,8 @@ lazy val bazApp = (projectMatrix in file("baz-app"))
       val cp = (Compile / fullClasspath).value.map(_.data.id)
       assert(cp.exists(_.endsWith("baz-core_2.13-0.1.0-SNAPSHOT.jar")), cp)
       assert(!cp.exists(_.endsWith("baz-core_3.0.0-M1-0.1.0-SNAPSHOT.jar")), cp)
-      assert(projectMatrixBaseDirectory.value == file("baz-app"))
+      assert(projectMatrixBaseDirectory.value == (ThisBuild / baseDirectory).value / "baz-app",
+        s"projectMatrixBaseDirectory is ${projectMatrixBaseDirectory.value}")
     },
   )
   .jvmPlatform(scalaVersions = Seq(scala213))
diff --git a/sbt-app/src/sbt-test/project-matrix/jvm/build.sbt b/sbt-app/src/sbt-test/project-matrix/jvm/build.sbt
index 1c422e7a3..3ee8a9578 100644
--- a/sbt-app/src/sbt-test/project-matrix/jvm/build.sbt
+++ b/sbt-app/src/sbt-test/project-matrix/jvm/build.sbt
@@ -19,7 +19,8 @@ lazy val core = (projectMatrix in file("core"))
   .settings(
     check := {
       assert(moduleName.value == "core", s"moduleName is ${moduleName.value}")
-      assert(projectMatrixBaseDirectory.value == file("core"))
+      assert(projectMatrixBaseDirectory.value == (ThisBuild / baseDirectory).value / "core",
+        s"projectMatrixBaseDirectory is ${projectMatrixBaseDirectory.value}")
     },
   )
   .jvmPlatform(scalaVersions = Seq(scala213, scala3))
@@ -28,7 +29,8 @@ lazy val intf = (projectMatrix in file("intf"))
   .settings(
     check := {
       assert(moduleName.value == "intf", s"moduleName is ${moduleName.value}")
-      assert(projectMatrixBaseDirectory.value == file("intf"))
+      assert(projectMatrixBaseDirectory.value == (ThisBuild / baseDirectory).value / "intf",
+        s"projectMatrixBaseDirectory is ${projectMatrixBaseDirectory.value}")
     },
   )
   .jvmPlatform(autoScalaLibrary = false)
diff --git a/sbt-app/src/sbt-test/project-matrix/projectAxes/build.sbt b/sbt-app/src/sbt-test/project-matrix/projectAxes/build.sbt
index 298b760bb..c7870d2b4 100644
--- a/sbt-app/src/sbt-test/project-matrix/projectAxes/build.sbt
+++ b/sbt-app/src/sbt-test/project-matrix/projectAxes/build.sbt
@@ -15,7 +15,8 @@ lazy val core = (projectMatrix in file("core"))
   .settings(
     check := {
        assert(platformTest.value.endsWith("-platform"))
-       assert(projectMatrixBaseDirectory.value == file("core"))
+       assert(projectMatrixBaseDirectory.value == (ThisBuild / baseDirectory).value / "core",
+         s"projectMatrixBaseDirectory is ${projectMatrixBaseDirectory.value}")
     },
   )
   .jvmPlatform(scalaVersions = Seq(scala213, scala212))
diff --git a/sbt-app/src/sbt-test/project-matrix/source-dep/build.sbt b/sbt-app/src/sbt-test/project-matrix/source-dep/build.sbt
new file mode 100644
index 000000000..4cd63d118
--- /dev/null
+++ b/sbt-app/src/sbt-test/project-matrix/source-dep/build.sbt
@@ -0,0 +1,10 @@
+// https://github.com/sbt/sbt/issues/8971
+ThisBuild / scalaVersion := "3.8.2"
+
+lazy val extLib = ProjectRef(file("ext/lib"), "lib")
+
+lazy val root = (project in file("."))
+  .settings(
+    name := "source-dep-matrix",
+  )
+  .dependsOn(extLib)
diff --git a/sbt-app/src/sbt-test/project-matrix/source-dep/ext/lib/build.sbt b/sbt-app/src/sbt-test/project-matrix/source-dep/ext/lib/build.sbt
new file mode 100644
index 000000000..9e5c68ec1
--- /dev/null
+++ b/sbt-app/src/sbt-test/project-matrix/source-dep/ext/lib/build.sbt
@@ -0,0 +1,7 @@
+ThisBuild / scalaVersion := "3.8.2"
+
+lazy val lib = (projectMatrix in file("."))
+  .settings(
+    name := "lib",
+  )
+  .jvmPlatform(scalaVersions = Seq("3.8.2"))
diff --git a/sbt-app/src/sbt-test/project-matrix/source-dep/ext/lib/src/main/scala/lib/Lib.scala b/sbt-app/src/sbt-test/project-matrix/source-dep/ext/lib/src/main/scala/lib/Lib.scala
new file mode 100644
index 000000000..e6b37d6d1
--- /dev/null
+++ b/sbt-app/src/sbt-test/project-matrix/source-dep/ext/lib/src/main/scala/lib/Lib.scala
@@ -0,0 +1,4 @@
+package lib
+
+object Lib:
+  val greeting: String = "hello from matrix lib"
diff --git a/sbt-app/src/sbt-test/project-matrix/source-dep/src/main/scala/Main.scala b/sbt-app/src/sbt-test/project-matrix/source-dep/src/main/scala/Main.scala
new file mode 100644
index 000000000..4ed1136f7
--- /dev/null
+++ b/sbt-app/src/sbt-test/project-matrix/source-dep/src/main/scala/Main.scala
@@ -0,0 +1,3 @@
+object Main:
+  def main(args: Array[String]): Unit =
+    println(lib.Lib.greeting)
diff --git a/sbt-app/src/sbt-test/project-matrix/source-dep/test b/sbt-app/src/sbt-test/project-matrix/source-dep/test
new file mode 100644
index 000000000..ee07fc8f6
--- /dev/null
+++ b/sbt-app/src/sbt-test/project-matrix/source-dep/test
@@ -0,0 +1,2 @@
+> compile
+> run