diff --git a/doc/usage.rst b/doc/usage.rst
index b5ee0d0270b..58e5b11dd94 100644
--- a/doc/usage.rst
+++ b/doc/usage.rst
@@ -504,7 +504,7 @@ context or can be the description of an opam switch, as follows:
   ``PATH``-like variables in this context. These variables are passed as part of
   the environment to any program launched by ``dune``. For each variable, the
   value is specified using the :ref:`ordered-set-language`. Relative paths are
-  interpreted with respect to the workspace root, see :ref:`finding-root`.
+  interpreted with respect to the context build directory.
 
 
 If environment variables, such as ``PATH``, are modified in the `dune-workspace`
diff --git a/src/context.ml b/src/context.ml
index f6ee5a4f736..1cd73ffe696 100644
--- a/src/context.ml
+++ b/src/context.ml
@@ -530,7 +530,7 @@ let create ~(kind : Kind.t) ~path ~env ~env_nodes ~name ~merlin ~targets
   in
   native :: List.filter_opt others
 
-let extend_paths t ~env =
+let extend_paths t ~env ~build_dir =
   let module Eval =
     Ordered_set_lang.Make(String)
       (struct
@@ -549,7 +549,13 @@ let extend_paths t ~env =
   in
   let vars =
     let to_absolute_filename s =
-      Path.of_string s |> Path.to_absolute_filename in
+      if Filename.is_relative s then
+        Path.Build.relative build_dir s
+        |> Path.build
+        |> Path.to_absolute_filename
+      else
+        s
+    in
     let sep = String.make 1 Bin.path_sep in
     let env = Env.Map.of_list_exn t in
     let f l = String.concat ~sep (List.map ~f:to_absolute_filename l) in
@@ -650,7 +656,9 @@ let instantiate_context env (workspace : Workspace.t)
       (Env_nodes.extra_env
          ~profile:(Workspace.Context.profile context) env_nodes)
   in
-  let env = extend_paths ~env (Workspace.Context.paths context) in
+  let build_dir =
+    Path.Build.relative Path.Build.root (Workspace.Context.name context) in
+  let env = extend_paths ~env ~build_dir (Workspace.Context.paths context) in
   match context with
   | Default { targets; name; host_context = _; profile; env = _
             ; toolchain ; paths = _; loc = _ } ->
diff --git a/test/blackbox-tests/test-cases/workspace-paths/bin/dune b/test/blackbox-tests/test-cases/workspace-paths/bin/dune
index 6cb22929627..75f54cbed6b 100644
--- a/test/blackbox-tests/test-cases/workspace-paths/bin/dune
+++ b/test/blackbox-tests/test-cases/workspace-paths/bin/dune
@@ -1,3 +1,3 @@
 (executable
  (name hello)
- (promote (until-clean)))
+)
diff --git a/test/blackbox-tests/test-cases/workspace-paths/bin/hello.exe b/test/blackbox-tests/test-cases/workspace-paths/bin/hello.exe
deleted file mode 100755
index 0a86f6b4eb5..00000000000
Binary files a/test/blackbox-tests/test-cases/workspace-paths/bin/hello.exe and /dev/null differ
diff --git a/test/blackbox-tests/test-cases/workspace-paths/run.t b/test/blackbox-tests/test-cases/workspace-paths/run.t
index 438ed74958f..933ab89b08e 100644
--- a/test/blackbox-tests/test-cases/workspace-paths/run.t
+++ b/test/blackbox-tests/test-cases/workspace-paths/run.t
@@ -1,6 +1,8 @@
-  $ dune build
+  $ dune build bin/hello.exe
+
+  $ dune build @default
          hello alias default
-  Hello: $TESTCASE_ROOT/a:/c
+  Hello: $TESTCASE_ROOT/_build/default/a:/c
 
   $ mkdir sub
   $ cat > sub/dune-workspace <<EOF