diff --git a/Documentation/Configuration File.md b/Documentation/Configuration File.md
index 48b84eb30..ae96a1768 100644
--- a/Documentation/Configuration File.md	
+++ b/Documentation/Configuration File.md	
@@ -43,7 +43,7 @@ The structure of the file is currently not guaranteed to be stable. Options may
   - `logLevel: "debug"|"info"|"default"|"error"|"fault"`: The level from which one onwards log messages should be written.
   - `privacyLevel: "public"|"private"|"sensitive"`: Whether potentially sensitive information should be redacted. Default is `public`, which redacts potentially sensitive information.
   - `inputMirrorDirectory: string`: Write all input received by SourceKit-LSP on stdin to a file in this directory. Useful to record and replay an entire SourceKit-LSP session.
-- `defaultWorkspaceType: "buildserver"|"compdb"|"swiftpm"`: Overrides workspace type selection logic.
+- `defaultWorkspaceType: "swiftPM"|"compilationDatabase"|"buildServer"`: Overrides workspace type selection logic.
 - `generatedFilesPath: string`: Directory in which generated interfaces and macro expansions should be stored.
 - `backgroundIndexing: bool`: Explicitly enable or disable background indexing.
 - `backgroundPreparationMode: "build"|"noLazy"|"enabled"`: Determines how background indexing should prepare a target. Possible values are:
diff --git a/Sources/SKOptions/SourceKitLSPOptions.swift b/Sources/SKOptions/SourceKitLSPOptions.swift
index 124452586..aa171d52f 100644
--- a/Sources/SKOptions/SourceKitLSPOptions.swift
+++ b/Sources/SKOptions/SourceKitLSPOptions.swift
@@ -280,7 +280,7 @@ public struct SourceKitLSPOptions: Sendable, Codable, Equatable {
     set { logging = newValue }
   }
 
-  /// Default workspace type (buildserver|compdb|swiftpm). Overrides workspace type selection logic.
+  /// Default workspace type (swiftPM|compilationDatabase|buildServer). Overrides workspace type selection logic.
   public var defaultWorkspaceType: WorkspaceType?
   public var generatedFilesPath: String?
 
@@ -444,6 +444,17 @@ public struct SourceKitLSPOptions: Sendable, Codable, Equatable {
     )
   }
 
+  public static func merging(base: SourceKitLSPOptions, workspaceFolder: DocumentURI) -> SourceKitLSPOptions {
+    return SourceKitLSPOptions.merging(
+      base: base,
+      override: SourceKitLSPOptions(
+        path: workspaceFolder.fileURL?
+          .appendingPathComponent(".sourcekit-lsp")
+          .appendingPathComponent("config.json")
+      )
+    )
+  }
+
   public var generatedFilesAbsolutePath: URL {
     if let generatedFilesPath {
       return URL(fileURLWithPath: generatedFilesPath)
diff --git a/Sources/SourceKitLSP/SourceKitLSPServer.swift b/Sources/SourceKitLSP/SourceKitLSPServer.swift
index 323d6fb12..8c6020d44 100644
--- a/Sources/SourceKitLSP/SourceKitLSPServer.swift
+++ b/Sources/SourceKitLSP/SourceKitLSPServer.swift
@@ -222,6 +222,8 @@ package actor SourceKitLSPServer {
       // was added to it and thus currently doesn't know that it can handle that file. In that case, we shouldn't open
       // a new workspace for the same root. Instead, the existing workspace's build system needs to be reloaded.
       let uri = DocumentURI(url)
+
+      let options = SourceKitLSPOptions.merging(base: self.options, workspaceFolder: uri)
       guard let buildSystemSpec = determineBuildSystem(forWorkspaceFolder: uri, options: self.options) else {
         continue
       }
@@ -231,7 +233,7 @@ package actor SourceKitLSPServer {
       guard
         let workspace = await orLog(
           "Creating workspace",
-          { try await createWorkspace(workspaceFolder: uri, buildSystemSpec: buildSystemSpec) }
+          { try await createWorkspace(workspaceFolder: uri, options: options, buildSystemSpec: buildSystemSpec) }
         )
       else {
         continue
@@ -821,6 +823,7 @@ extension SourceKitLSPServer {
   /// If the build system that was determined for the workspace does not satisfy `condition`, `nil` is returned.
   private func createWorkspace(
     workspaceFolder: DocumentURI,
+    options: SourceKitLSPOptions,
     buildSystemSpec: BuildSystemSpec?
   ) async throws -> Workspace {
     guard let capabilityRegistry = capabilityRegistry else {
@@ -828,15 +831,7 @@ extension SourceKitLSPServer {
       logger.log("Cannot open workspace before server is initialized")
       throw NoCapabilityRegistryError()
     }
-    let testHooks = self.testHooks
-    let options = SourceKitLSPOptions.merging(
-      base: self.options,
-      override: SourceKitLSPOptions(
-        path: workspaceFolder.fileURL?
-          .appendingPathComponent(".sourcekit-lsp")
-          .appendingPathComponent("config.json")
-      )
-    )
+
     logger.log("Creating workspace at \(workspaceFolder.forLogging) with options: \(options.forLogging)")
     logger.logFullObjectInMultipleLogMessages(header: "Options for workspace", options.loggingProxy)
 
@@ -848,7 +843,7 @@ extension SourceKitLSPServer {
       buildSystemSpec: buildSystemSpec,
       toolchainRegistry: self.toolchainRegistry,
       options: options,
-      testHooks: testHooks,
+      testHooks: self.testHooks,
       indexTaskScheduler: indexTaskScheduler
     )
     return workspace
@@ -857,9 +852,12 @@ extension SourceKitLSPServer {
   /// Determines the build system for the given workspace folder and creates a `Workspace` that uses this inferred build
   /// system.
   private func createWorkspaceWithInferredBuildSystem(workspaceFolder: DocumentURI) async throws -> Workspace {
+    let options = SourceKitLSPOptions.merging(base: self.options, workspaceFolder: workspaceFolder)
+    let buildSystemSpec = determineBuildSystem(forWorkspaceFolder: workspaceFolder, options: options)
     return try await self.createWorkspace(
       workspaceFolder: workspaceFolder,
-      buildSystemSpec: determineBuildSystem(forWorkspaceFolder: workspaceFolder, options: self.options)
+      options: options,
+      buildSystemSpec: buildSystemSpec
     )
   }
 
diff --git a/Tests/SourceKitLSPTests/WorkspaceTests.swift b/Tests/SourceKitLSPTests/WorkspaceTests.swift
index 84a1187bc..0101e90c5 100644
--- a/Tests/SourceKitLSPTests/WorkspaceTests.swift
+++ b/Tests/SourceKitLSPTests/WorkspaceTests.swift
@@ -10,6 +10,7 @@
 //
 //===----------------------------------------------------------------------===//
 
+import BuildSystemIntegration
 import Foundation
 import LanguageServerProtocol
 import SKLogging
@@ -967,4 +968,60 @@ final class WorkspaceTests: XCTestCase {
       ["Cannot convert value of type 'Int' to specified type 'String'"]
     )
   }
+
+  func testWorkspaceOptionsOverrideBuildSystem() async throws {
+    let swiftc = try await unwrap(ToolchainRegistry.forTesting.default?.swiftc)
+    let sdkArgs =
+      if let defaultSDKPath {
+        """
+        -sdk '\(defaultSDKPath)'
+        """
+      } else {
+        ""
+      }
+
+    let project = try await MultiFileTestProject(files: [
+      ".sourcekit-lsp/config.json": """
+      {
+          "defaultWorkspaceType": "compilationDatabase"
+      }
+      """,
+      "Foo.swift": """
+      #if HAVE_SETTINGS
+      #error("Have settings")
+      #endif
+      """,
+      "Sources/MyLib/Bar.swift": "",
+      "build/compile_commands.json": """
+      [
+      {
+        "directory": "$TEST_DIR",
+        "command": "\(swiftc.filePath) $TEST_DIR/Foo.swift -DHAVE_SETTINGS \(sdkArgs)",
+        "file": "Foo.swift",
+        "output": "build/Foo.swift.o"
+      },
+      ]
+      """,
+      "Package.swift": """
+      // swift-tools-version: 5.7
+
+      import PackageDescription
+
+      let package = Package(
+        name: "MyLib",
+        targets: [
+          .target(name: "MyLib"),
+        ]
+      )
+      """,
+    ])
+    let (uri, _) = try project.openDocument("Foo.swift")
+    let diagnostics = try await project.testClient.send(
+      DocumentDiagnosticsRequest(textDocument: TextDocumentIdentifier(uri))
+    )
+    XCTAssertEqual(
+      diagnostics.fullReport?.items.map(\.message),
+      ["Have settings"]
+    )
+  }
 }