diff --git a/news/3011.feature.md b/news/3011.feature.md
deleted file mode 100644
index fe237a3ca6..0000000000
--- a/news/3011.feature.md
+++ /dev/null
@@ -1 +0,0 @@
-Add `__init__.py` to the `pdm` package, making it a normal package.
diff --git a/news/3022.bugfix.md b/news/3022.bugfix.md
new file mode 100644
index 0000000000..485b75216a
--- /dev/null
+++ b/news/3022.bugfix.md
@@ -0,0 +1 @@
+Fix a mistake in build env setup that will cause the `PATH` env var length to grow.
diff --git a/pyproject.toml b/pyproject.toml
index 77a20a90b2..acff9c3863 100644
--- a/pyproject.toml
+++ b/pyproject.toml
@@ -76,7 +76,7 @@ pdm = "pdm.core:main"
 
 [tool.pdm.version]
 source = "scm"
-write_to = "pdm/VERSION"
+write_to = "pdm/models/VERSION"
 
 [tool.pdm.build]
 excludes = ["./**/.git"]
diff --git a/src/pdm/__init__.py b/src/pdm/__init__.py
deleted file mode 100644
index 3186b73248..0000000000
--- a/src/pdm/__init__.py
+++ /dev/null
@@ -1 +0,0 @@
-"""This __init__.py file is empty and does not expose any members at the package level."""
diff --git a/src/pdm/__version__.py b/src/pdm/__version__.py
index 278be57499..34405f3b1a 100644
--- a/src/pdm/__version__.py
+++ b/src/pdm/__version__.py
@@ -5,7 +5,7 @@ def read_version() -> str:
     try:
         return importlib_metadata.version(__package__ or "pdm")
     except importlib_metadata.PackageNotFoundError:
-        return resources_read_text("pdm", "VERSION").strip()
+        return resources_read_text("pdm.models", "VERSION").strip()
 
 
 __version__ = read_version()
diff --git a/src/pdm/builders/base.py b/src/pdm/builders/base.py
index e93c6c5d51..408c253d5e 100644
--- a/src/pdm/builders/base.py
+++ b/src/pdm/builders/base.py
@@ -137,7 +137,7 @@ def __init__(self, executable: str, shared: str, overlay: str) -> None:
         for path in (overlay, shared):
             paths = get_sys_config_paths(executable, vars={"base": path, "platbase": path}, kind="prefix")
             self.bin_dirs.append(paths["scripts"])
-            self.lib_dirs.extend([paths["platlib"], paths["purelib"]])
+            self.lib_dirs.extend({paths["platlib"], paths["purelib"]})
         self.site_dir = os.path.join(overlay, "site")
         if os.path.isdir(self.site_dir):
             # Clear existing site dir as .pyc may be cached.
@@ -181,7 +181,7 @@ class EnvBuilder:
     if TYPE_CHECKING:
         _hook: BuildBackendHookCaller
         _requires: list[str]
-        _prefix: _Prefix
+        _prefix: _Prefix | None
 
     def get_shared_env(self, key: int) -> str:
         if key in self._shared_envs:
@@ -234,21 +234,24 @@ def init_build_system(self, build_system: dict[str, Any]) -> None:
             python_executable=self.executable,
         )
         self._requires = build_system["requires"]
-        self._prefix = _Prefix(
-            self.executable,
-            # Build backends with the same requires list share the cached base env.
-            shared=self.get_shared_env(hash(frozenset(self._requires))),
-            # Overlay envs are unique for each source to be built.
-            overlay=self.get_overlay_env(os.path.normcase(self.src_dir).rstrip("\\/")),
+        self._prefix = (
+            _Prefix(
+                self.executable,
+                # Build backends with the same requires list share the cached base env.
+                shared=self.get_shared_env(hash(frozenset(self._requires))),
+                # Overlay envs are unique for each source to be built.
+                overlay=self.get_overlay_env(os.path.normcase(self.src_dir).rstrip("\\/")),
+            )
+            if self.isolated
+            else None
         )
 
     @property
     def _env_vars(self) -> dict[str, str]:
-        paths = self._prefix.bin_dirs
-        if "PATH" in os.environ:
-            paths.append(os.getenv("PATH", ""))
         env: dict[str, str] = {}
         if self.isolated:
+            assert self._prefix is not None
+            paths = self._prefix.bin_dirs[:]
             env.update(
                 {
                     "PYTHONPATH": self._prefix.site_dir,
@@ -257,14 +260,15 @@ def _env_vars(self) -> dict[str, str]:
             )
         else:
             env_paths = self._env.get_paths()
-            project_libs = env_paths["purelib"]
-            pythonpath = [*self._prefix.lib_dirs, project_libs]
+            pythonpath = list({env_paths["purelib"], env_paths["platlib"]})
             if "PYTHONPATH" in os.environ:
                 pythonpath.append(os.getenv("PYTHONPATH", ""))
             env.update(
                 PYTHONPATH=os.pathsep.join(pythonpath),
             )
-            paths.append(env_paths["scripts"])
+            paths = [env_paths["scripts"]]
+        if "PATH" in os.environ:
+            paths.append(os.getenv("PATH", ""))
         env["PATH"] = os.pathsep.join(paths)
         return env
 
@@ -279,8 +283,12 @@ def subprocess_runner(
     def check_requirements(self, reqs: Iterable[str]) -> Iterable[Requirement]:
         missing = set()
         conflicting = set()
-        project_lib = self._env.get_paths()["purelib"]
-        libs = self._prefix.lib_dirs + ([project_lib] if not self.isolated else [])
+        env_paths = self._env.get_paths()
+        libs = (
+            list({env_paths["purelib"], env_paths["platlib"]})
+            if not self.isolated
+            else cast(_Prefix, self._prefix).lib_dirs
+        )
         if reqs:
             ws = WorkingSet(libs)
             for req in reqs:
@@ -308,6 +316,7 @@ def install(self, requirements: Iterable[str], shared: bool = False) -> None:
         missing = list(self.check_requirements(requirements))
         if not missing:
             return
+        assert self._prefix is not None
         path = self._prefix.shared if shared else self._prefix.overlay
         env = PythonEnvironment(self._env.project, python=str(self._env.interpreter.path), prefix=path)
         install_requirements(missing, env)
diff --git a/src/pdm/builders/sdist.py b/src/pdm/builders/sdist.py
index 0728171227..bfffcb9580 100644
--- a/src/pdm/builders/sdist.py
+++ b/src/pdm/builders/sdist.py
@@ -3,6 +3,7 @@
 import os
 
 from pdm.builders.base import EnvBuilder, wrap_error
+from pdm.termui import logger
 
 
 class SdistBuilder(EnvBuilder):
@@ -14,5 +15,8 @@ def build(self, out_dir: str, metadata_directory: str | None = None) -> str:
             self.install(self._requires, shared=True)
             requires = self._hook.get_requires_for_build_sdist(self.config_settings)
             self.install(requires)
+        lib = self._env.get_paths()["purelib"]
+        logger.info("Libs(%s): %s", lib, os.listdir(lib))
+        logger.info("PYTHONPATH: %s", self._env_vars["PYTHONPATH"])
         filename = self._hook.build_sdist(out_dir, self.config_settings)
         return os.path.join(out_dir, filename)
diff --git a/tests/cli/test_build.py b/tests/cli/test_build.py
index 6e49d25d25..cef49baa93 100644
--- a/tests/cli/test_build.py
+++ b/tests/cli/test_build.py
@@ -159,17 +159,12 @@ def test_cli_build_with_config_settings(fixture_project, pdm):
 
 
 @pytest.mark.usefixtures("local_finder")
-@pytest.mark.parametrize("isolated", (True, False))
-def test_build_with_no_isolation(fixture_project, pdm, isolated):
-    project = fixture_project("demo-failure")
-    project.pyproject.set_data({"project": {"name": "demo", "version": "0.1.0"}})
-    project.pyproject.write()
-    pdm(["add", "first"], obj=project)
-    args = ["build"]
-    if not isolated:
-        args.append("--no-isolation")
-    result = pdm(args, obj=project)
-    assert result.exit_code == int(isolated)
+def test_build_with_no_isolation(pdm, project):
+    result = pdm(["build", "--no-isolation"], obj=project)
+    assert result.exit_code == 1
+    pdm(["add", "pdm-backend", "--no-self"], obj=project, strict=True)
+    result = pdm(["build", "--no-isolation"], obj=project)
+    assert result.exit_code == 0
 
 
 def test_build_ignoring_pip_environment(fixture_project, monkeypatch):