diff --git a/lib/setModel.js b/lib/setModel.js
index d0544d2..c61caa3 100644
--- a/lib/setModel.js
+++ b/lib/setModel.js
@@ -1,9 +1,10 @@
 import cds from '@sap/cds'
 import fs from 'fs'
+import path from 'path'
 
 // Ensures only one CDS model compilation is ever in-flight.
 // The moment setModel is called, cds.model is set to a promise.
-export default async function setModel(path) {
+export default async function setModel(projectPath) {
   if (cds.model) {
     // If cds.model is a promise, await it; if it's resolved, return it
     if (typeof cds.model.then === 'function') await cds.model
@@ -11,7 +12,7 @@ export default async function setModel(path) {
   }
   // Assign a promise immediately to cds.model to prevent duplicate compilations
   cds.model = (async () => {
-    const compiled = await compileModel(path)
+    const compiled = await compileModel(projectPath)
     cds.model = compiled
     return compiled
   })()
@@ -20,16 +21,16 @@ export default async function setModel(path) {
 }
 
 // Loads and compiles the CDS model, returns the compiled model or throws on error
-async function compileModel(path) {
-  cds.root = path
+async function compileModel(projectPath) {
+  cds.root = projectPath
   const startTime = Date.now()
-  const resolved = cds.resolve(path + '/*', { cache: {} }) // make sure NOT to use the cache
+  const resolved = cds.resolve(projectPath + '/*', { cache: {} }) // use CAP standard resolution for model compilation
   let compiled = await cds.load(resolved, { docs: true, locations: true })
   if (!compiled || (Array.isArray(compiled) && compiled.length === 0)) {
-    throw new Error(`Failed to load CDS model from path: ${path}`)
+    throw new Error(`Failed to load CDS model from path: ${projectPath}`)
   }
   if (!compiled.definitions || Object.keys(compiled.definitions).length === 0) {
-    throw new Error(`Compiled CDS model is invalid or empty for path: ${path}`)
+    throw new Error(`Compiled CDS model is invalid or empty for path: ${projectPath}`)
   }
   compiled = cds.compile.for.nodejs(compiled) // to include drafts, show effective types
   const serviceInfo = cds.compile.to.serviceinfo(compiled)
@@ -41,7 +42,10 @@ async function compileModel(path) {
   }
 
   for (const name in compiled.definitions) {
-    Object.defineProperty(compiled.definitions[name], 'name', { value: name, enumerable: true })
+    Object.defineProperty(compiled.definitions[name], 'name', {
+      value: name,
+      enumerable: true
+    })
   }
 
   const _entities_in = service => {
@@ -81,9 +85,9 @@ async function compileModel(path) {
       ? parseInt(process.env.CDS_MCP_REFRESH_MS, 10)
       : Math.max(compileDuration * 10, 20000)
     changeWatcher = setInterval(async () => {
-      const hasChanged = await cdsFilesChanged(path)
+      const hasChanged = await cdsFilesChanged(projectPath)
       if (hasChanged) {
-        await refreshModel(path)
+        await refreshModel(projectPath)
       }
     }, intervalMs).unref() // Uses CDS_MCP_REFRESH_MS if set, otherwise defaults to 10x compile duration or 20s
   }
@@ -91,9 +95,9 @@ async function compileModel(path) {
 }
 
 // Refreshes the CDS model, only replaces cds.model if compilation succeeds
-async function refreshModel(path) {
+async function refreshModel(projectPath) {
   try {
-    const compiled = await compileModel(path)
+    const compiled = await compileModel(projectPath)
     cds.model = compiled
     return compiled
   } catch {
@@ -105,9 +109,25 @@ async function refreshModel(path) {
 const cache = { cdsFiles: new Map() }
 let changeWatcher = null
 
-async function cdsFilesChanged(path) {
-  if (path.endsWith('/')) path = path.slice(0, -1)
-  const files = cds.resolve(path + '/*', { cache: {} }) || []
+async function cdsFilesChanged(projectPath) {
+  // Recursively find all .cds files under root, ignoring node_modules
+  async function findCdsFiles(dir) {
+    let results = []
+    const entries = await fs.promises.readdir(dir, { withFileTypes: true })
+    for (const entry of entries) {
+      const fullPath = path.join(dir, entry.name)
+      if (entry.isDirectory()) {
+        if (entry.name === 'node_modules') continue
+        results = results.concat(await findCdsFiles(fullPath))
+      } else if (entry.isFile() && entry.name.endsWith('.cds')) {
+        results.push(fullPath)
+      }
+    }
+    return results
+  }
+
+  if (projectPath.endsWith('/')) projectPath = projectPath.slice(0, -1)
+  const files = await findCdsFiles(projectPath)
   const currentTimestamps = new Map()
   await Promise.all(
     files.map(file =>