diff --git a/Sources/PackageLoading/TargetSourcesBuilder.swift b/Sources/PackageLoading/TargetSourcesBuilder.swift
index 2aceefe4e08..011ee05b2f3 100644
--- a/Sources/PackageLoading/TargetSourcesBuilder.swift
+++ b/Sources/PackageLoading/TargetSourcesBuilder.swift
@@ -187,6 +187,10 @@ public struct TargetSourcesBuilder {
                     } else {
                         matchedRule = .compile
                     }
+                    // The source file might have been declared twice so
+                    // exit on first match.
+                    // FIXME: We should emitting warnings for duplicate// declarations.
+                    break
                 }
             }
         }
@@ -221,6 +225,11 @@ public struct TargetSourcesBuilder {
         }
     }
 
+    /// Returns true if the given path is a declared source.
+    func isDeclaredSource(_ path: AbsolutePath) -> Bool {
+        return path == targetPath || declaredSources?.contains(path) == true
+    }
+
     /// Compute the contents of the files in a target.
     ///
     /// This avoids recursing into certain directories like exclude or the
@@ -258,14 +267,22 @@ public struct TargetSourcesBuilder {
                 continue
             }
 
-            // Append and continue if the path doesn't have an extension or is not a directory.
-            if curr.extension != nil || !fs.isDirectory(curr) {
+            // Consider non-directories as source files.
+            if !fs.isDirectory(curr) {
                 contents.append(curr)
                 continue
             }
 
             // At this point, curr can only be a directory.
             //
+            // Starting tools version with resources, pick directories as
+            // sources that have an extension but are not explicitly
+            // declared as sources in the manifest.
+            if toolsVersion >= .vNext && curr.extension != nil && !isDeclaredSource(curr) {
+                contents.append(curr)
+                continue
+            }
+
             // Check if the directory is marked to be copied.
             let directoryMarkedToBeCopied = target.resources.contains{ resource in
                 let resourcePath = self.targetPath.appending(RelativePath(resource.path))
diff --git a/Tests/PackageLoadingTests/PackageBuilderTests.swift b/Tests/PackageLoadingTests/PackageBuilderTests.swift
index 718b8ab176b..7ed6522a0a7 100644
--- a/Tests/PackageLoadingTests/PackageBuilderTests.swift
+++ b/Tests/PackageLoadingTests/PackageBuilderTests.swift
@@ -246,6 +246,79 @@ class PackageBuilderTests: XCTestCase {
         }
     }
 
+    func testDeclaredSourcesWithDot() throws {
+        let fs = InMemoryFileSystem(emptyFiles:
+            "/Sources/swift.lib/foo.swift",
+            "/Sources/swiftlib1/swift.lib/foo.swift",
+            "/Sources/swiftlib2/swift.lib/foo.swift",
+            "/Sources/swiftlib3/swift.lib/foo.swift",
+            "/Sources/swiftlib3/swift.lib/foo.bar/bar.swift",
+            "/done"
+        )
+
+        let manifest = Manifest.createV4Manifest(
+            name: "MyPackage",
+            targets: [
+                TargetDescription(
+                    name: "swift.lib"
+                ),
+                TargetDescription(
+                    name: "swiftlib1",
+                    path: "Sources/swiftlib1",
+                    sources: ["swift.lib"]
+                ),
+                TargetDescription(
+                    name: "swiftlib2",
+                    path: "Sources/swiftlib2/swift.lib"
+                ),
+                TargetDescription(
+                    name: "swiftlib3",
+                    path: "Sources/swiftlib3/swift.lib"
+                ),
+            ]
+        )
+        PackageBuilderTester(manifest, in: fs) { result, _ in
+            result.checkModule("swift.lib") { module in
+                module.checkSources(sources: ["foo.swift"])
+            }
+            result.checkModule("swiftlib1") { module in
+                module.checkSources(sources: ["swift.lib/foo.swift"])
+            }
+            result.checkModule("swiftlib2") { module in
+                module.checkSources(sources: ["foo.swift"])
+            }
+            result.checkModule("swiftlib3") { module in
+                module.checkSources(sources: ["foo.bar/bar.swift", "foo.swift"])
+            }
+        }
+    }
+
+    func testOverlappingDeclaredSources() throws {
+        let fs = InMemoryFileSystem(emptyFiles:
+            "/Sources/clib/subfolder/foo.h",
+            "/Sources/clib/subfolder/foo.c",
+            "/Sources/clib/bar.h",
+            "/Sources/clib/bar.c",
+            "/done"
+        )
+
+        let manifest = Manifest.createV4Manifest(
+            name: "MyPackage",
+            targets: [
+                TargetDescription(
+                    name: "clib",
+                    path: "Sources",
+                    sources: ["clib", "clib/subfolder"]
+                ),
+            ]
+        )
+        PackageBuilderTester(manifest, in: fs) { result, _ in
+            result.checkModule("clib") { module in
+                module.checkSources(sources: ["clib/bar.c", "clib/subfolder/foo.c"])
+            }
+        }
+    }
+
     func testDeclaredExecutableProducts() {
         // Check that declaring executable product doesn't collide with the
         // inferred products.
diff --git a/Tests/PackageLoadingTests/TargetSourcesBuilderTests.swift b/Tests/PackageLoadingTests/TargetSourcesBuilderTests.swift
index c0caf0eba9a..e7adf56ee8d 100644
--- a/Tests/PackageLoadingTests/TargetSourcesBuilderTests.swift
+++ b/Tests/PackageLoadingTests/TargetSourcesBuilderTests.swift
@@ -60,7 +60,7 @@ class TargetSourcesBuilderTests: XCTestCase {
         XCTAssertEqual(contents, [
             "/Bar.swift",
             "/Foo.swift",
-            "/Hello.something",
+            "/Hello.something/hello.txt",
             "/file",
             "/path/to/somefile.txt",
             "/some/path.swift",
@@ -70,6 +70,43 @@ class TargetSourcesBuilderTests: XCTestCase {
         XCTAssertNoDiagnostics(diags)
     }
 
+    func testDirectoryWithExt() throws {
+        let target = TargetDescription(
+            name: "Foo",
+            path: nil,
+            exclude: ["some2"],
+            sources: nil,
+            publicHeadersPath: nil,
+            type: .regular
+        )
+
+        let fs = InMemoryFileSystem()
+        fs.createEmptyFiles(at: .root, files: [
+            "/.some2/hello.swift",
+            "/Hello.something/hello.txt",
+        ])
+
+        let diags = DiagnosticsEngine()
+
+        let builder = TargetSourcesBuilder(
+            packageName: "",
+            packagePath: .root,
+            target: target,
+            path: .root,
+            toolsVersion: .vNext,
+            fs: fs,
+            diags: diags
+        )
+
+        let contents = builder.computeContents().map{ $0.pathString }.sorted()
+
+        XCTAssertEqual(contents, [
+            "/Hello.something",
+        ])
+
+        XCTAssertNoDiagnostics(diags)
+    }
+
     func testBasicRuleApplication() throws {
         let target = TargetDescription(
             name: "Foo",