diff --git a/tests/integration/buildcmd/build_integ_base.py b/tests/integration/buildcmd/build_integ_base.py
index 2dab556843..9c22e11192 100644
--- a/tests/integration/buildcmd/build_integ_base.py
+++ b/tests/integration/buildcmd/build_integ_base.py
@@ -84,6 +84,7 @@ def get_command_list(
         build_in_source=None,
         mount_with=None,
         config_file=None,
+        project_root_dir=None,
     ):
         command_list = [self.cmd, "build"]
 
@@ -150,6 +151,9 @@ def get_command_list(
         if config_file is not None:
             command_list += ["--config-file", config_file]
 
+        if project_root_dir is not None:
+            command_list += ["--terraform-project-root-path", project_root_dir]
+
         return command_list
 
     def verify_docker_container_cleanedup(self, runtime):
diff --git a/tests/integration/buildcmd/test_build_terraform_applications_other_cases.py b/tests/integration/buildcmd/test_build_terraform_applications_other_cases.py
index 2320fa0737..e9282013d8 100644
--- a/tests/integration/buildcmd/test_build_terraform_applications_other_cases.py
+++ b/tests/integration/buildcmd/test_build_terraform_applications_other_cases.py
@@ -6,6 +6,7 @@
 
 from parameterized import parameterized, parameterized_class
 
+from samcli.lib.utils.colors import Colored
 from tests.integration.buildcmd.test_build_terraform_applications import (
     BuildTerraformApplicationIntegBase,
     BuildTerraformApplicationS3BackendIntegBase,
@@ -52,6 +53,27 @@ def test_exit_failed_use_container_no_build_image_hooks(self):
         )
         self.assertNotEqual(return_code, 0)
 
+    def test_exit_failed_project_root_dir_no_hooks(self):
+        cmdlist = self.get_command_list(beta_features=True, project_root_dir="/path")
+        _, stderr, return_code = self.run_command(cmdlist)
+        process_stderr = stderr.strip()
+        self.assertRegex(
+            process_stderr.decode("utf-8"),
+            "Error: Missing option --hook-name",
+        )
+        self.assertNotEqual(return_code, 0)
+
+    def test_exit_failed_project_root_dir_not_parent_of_current_directory(self):
+        cmdlist = self.get_command_list(beta_features=True, hook_name="terraform", project_root_dir="/path")
+        _, stderr, return_code = self.run_command(cmdlist)
+        process_stderr = stderr.strip()
+        self.assertRegex(
+            process_stderr.decode("utf-8"),
+            "Error: /path is not a valid value for Terraform Project Root Path. It should "
+            "be a parent of the current directory that contains the root module of the terraform project.",
+        )
+        self.assertNotEqual(return_code, 0)
+
     def test_exit_failed_use_container_short_format_no_build_image_hooks(self):
         cmdlist = self.get_command_list(beta_features=True, hook_name="terraform")
         cmdlist += ["-u"]
@@ -384,3 +406,60 @@ def test_invoke_function(self):
             overrides=None,
             expected_result="{'message': 'Hello World'}",
         )
+
+
+@skipIf(
+    (not RUN_BY_CANARY and not CI_OVERRIDE),
+    "Skip Terraform test cases unless running in CI",
+)
+class TestBuildTerraformApplicationsSourceCodeAndModulesAreNotInRootModuleDirectory(BuildTerraformApplicationIntegBase):
+    terraform_application = Path("terraform/application_outside_root_directory")
+
+    functions = [
+        ("aws_lambda_function.function1", "hello world 1"),
+        ("module.function2.aws_lambda_function.this", "hello world 1"),
+        ("module.function7.aws_lambda_function.this[0]", "hello world 1"),
+    ]
+
+    def setUp(self):
+        super().setUp()
+        self.project_dir = self.working_dir
+        self.working_dir = f"{self.working_dir}/root_module"
+
+    def tearDown(self):
+        if self.project_dir:
+            self.working_dir = self.project_dir
+        super().tearDown()
+
+    @parameterized.expand(functions)
+    def test_build_and_invoke_lambda_functions(self, function_identifier, expected_output):
+        command_list_parameters = {
+            "beta_features": True,
+            "hook_name": "terraform",
+            "function_identifier": function_identifier,
+            "project_root_dir": "./..",
+        }
+        build_cmd_list = self.get_command_list(**command_list_parameters)
+        LOG.info("command list: %s", build_cmd_list)
+        stdout, stderr, return_code = self.run_command(build_cmd_list)
+        terraform_beta_feature_prompted_text = (
+            f"Supporting Terraform applications is a beta feature.{os.linesep}"
+            f"Please confirm if you would like to proceed using AWS SAM CLI with terraform application.{os.linesep}"
+            "You can also enable this beta feature with 'sam build --beta-features'."
+        )
+        experimental_warning = (
+            f"{os.linesep}Experimental features are enabled for this session.{os.linesep}"
+            f"Visit the docs page to learn more about the AWS Beta terms "
+            f"https://aws.amazon.com/service-terms/.{os.linesep}"
+        )
+        self.assertNotRegex(stdout.decode("utf-8"), terraform_beta_feature_prompted_text)
+        self.assertIn(Colored().yellow(experimental_warning), stderr.decode("utf-8"))
+        LOG.info("sam build stdout: %s", stdout.decode("utf-8"))
+        LOG.info("sam build stderr: %s", stderr.decode("utf-8"))
+        self.assertEqual(return_code, 0)
+
+        self._verify_invoke_built_function(
+            function_logical_id=function_identifier,
+            overrides=None,
+            expected_result={"statusCode": 200, "body": expected_output},
+        )
diff --git a/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/modules/lambda_function/main.tf b/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/modules/lambda_function/main.tf
new file mode 100644
index 0000000000..0200f69dfe
--- /dev/null
+++ b/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/modules/lambda_function/main.tf
@@ -0,0 +1,42 @@
+variable "source_code" {
+  type = string
+}
+
+variable "function_name" {
+  type = string
+}
+
+variable "layers" {
+  type = list
+  default = []
+}
+
+resource "aws_iam_role" "iam_for_lambda" {
+  name = "iam_for_lambda2"
+
+  assume_role_policy = <<EOF
+{
+  "Version": "2012-10-17",
+  "Statement": [
+    {
+      "Action": "sts:AssumeRole",
+      "Principal": {
+        "Service": "lambda.amazonaws.com"
+      },
+      "Effect": "Allow",
+      "Sid": ""
+    }
+  ]
+}
+EOF
+}
+
+resource "aws_lambda_function" "this" {
+    filename = var.source_code
+    handler = "app.lambda_handler"
+    runtime = "python3.8"
+    function_name = var.function_name
+    role = aws_iam_role.iam_for_lambda.arn
+    layers = var.layers
+    timeout = 300
+}
\ No newline at end of file
diff --git a/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/modules/lambda_layer/main.tf b/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/modules/lambda_layer/main.tf
new file mode 100644
index 0000000000..bdd0ab7dda
--- /dev/null
+++ b/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/modules/lambda_layer/main.tf
@@ -0,0 +1,18 @@
+variable "source_code" {
+  type = string
+}
+
+variable "name" {
+  type = string
+}
+
+resource "aws_lambda_layer_version" "layer" {
+  filename   = var.source_code
+  layer_name = var.name
+
+  compatible_runtimes = ["python3.8"]
+}
+
+output "arn" {
+  value = aws_lambda_layer_version.layer.arn
+}
\ No newline at end of file
diff --git a/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/py_build.sh b/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/py_build.sh
new file mode 100755
index 0000000000..9e45e0ef50
--- /dev/null
+++ b/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/py_build.sh
@@ -0,0 +1,28 @@
+#!/bin/bash
+src_code=$1
+build_path=$2
+output_name=$3
+resource_type=$4
+echo "building ${resource_type} ${src_code} into ${build_path}"
+
+temp_path=${build_path}/tmp_building/${output_name}
+if [[ "${resource_type}" == "Layer" ]]; then
+  temp_path=${build_path}/tmp_building/${output_name}/python
+  echo "new path ${temp_path}"
+fi
+
+mkdir -p ${build_path}
+mkdir -p ${build_path}/tmp_building
+mkdir -p ${build_path}/tmp_building/${output_name}
+mkdir -p ${temp_path}
+rm -rf ${temp_path}/*
+
+cp -r $src_code/* ${temp_path}
+pip install -r ${temp_path}/requirements.txt -t ${temp_path}/.
+current=$(pwd)
+cd ${build_path}/tmp_building/${output_name}
+zip -r ${output_name} .
+cd ${current}
+mv "${build_path}/tmp_building/${output_name}/${output_name}" "${build_path}/$output_name"
+rm -rf ${build_path}/tmp_building/${output_name}
+rm -rf ${build_path}/tmp_building
diff --git a/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/root_module/main.tf b/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/root_module/main.tf
new file mode 100644
index 0000000000..75b47692f2
--- /dev/null
+++ b/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/root_module/main.tf
@@ -0,0 +1,195 @@
+provider "aws" {}
+
+variable "HELLO_FUNCTION_SRC_CODE" {
+  type    = string
+  default = "../src/artifacts/HelloWorldFunction"
+}
+
+resource "aws_iam_role" "iam_for_lambda" {
+  name = "dummy_iam_role"
+
+  assume_role_policy = <<EOF
+{
+    "Version": "2012-10-17",
+    "Statement": [
+        {
+            "Action": "sts:AssumeRole",
+            "Principal": {
+                "Service": "lambda.amazonaws.com"
+            },
+            "Effect": "Allow",
+            "Sid": ""
+        }
+    ]
+}
+EOF
+}
+
+locals {
+  building_path                  = "../building"
+  hello_world_function_src_path  = var.HELLO_FUNCTION_SRC_CODE
+  hello_world_artifact_file_name = "hello_world.zip"
+  layer1_src_path                = "../src/artifacts/layer1"
+  layer1_artifact_file_name      = "layer1.zip"
+}
+
+## /* layer1
+resource "null_resource" "build_layer1_version" {
+  triggers = {
+    build_number = "${timestamp()}"
+  }
+
+  provisioner "local-exec" {
+    command = "../py_build.sh \"${local.layer1_src_path}\" \"${local.building_path}\" \"${local.layer1_artifact_file_name}\" Layer"
+  }
+}
+
+resource "null_resource" "sam_metadata_aws_lambda_layer_version_layer1" {
+  triggers = {
+    resource_name = "aws_lambda_layer_version.layer1[0]"
+    resource_type = "LAMBDA_LAYER"
+
+    original_source_code = local.layer1_src_path
+    built_output_path    = "${local.building_path}/${local.layer1_artifact_file_name}"
+  }
+  depends_on = [
+    null_resource.build_layer1_version
+  ]
+}
+
+resource "aws_lambda_layer_version" "layer1" {
+  count               = 1
+  filename            = "${local.building_path}/${local.layer1_artifact_file_name}"
+  layer_name          = "lambda_layer1"
+  compatible_runtimes = ["python3.8"]
+  depends_on = [
+    null_resource.build_layer1_version
+  ]
+}
+
+## */ layer1
+
+## /* function1 connected to layer1
+
+resource "null_resource" "build_hello_world_lambda_function" {
+  triggers = {
+    build_number = "${timestamp()}"
+  }
+
+  provisioner "local-exec" {
+    command = "../py_build.sh \"${local.hello_world_function_src_path}\" \"${local.building_path}\" \"${local.hello_world_artifact_file_name}\" Function"
+  }
+}
+
+resource "null_resource" "sam_metadata_aws_lambda_function1" {
+  triggers = {
+    resource_name        = "aws_lambda_function.function1"
+    resource_type        = "ZIP_LAMBDA_FUNCTION"
+    original_source_code = local.hello_world_function_src_path
+    built_output_path    = "${local.building_path}/${local.hello_world_artifact_file_name}"
+  }
+  depends_on = [
+    null_resource.build_hello_world_lambda_function
+  ]
+}
+
+resource "aws_lambda_function" "function1" {
+  filename      = "${local.building_path}/${local.hello_world_artifact_file_name}"
+  handler       = "app.lambda_handler"
+  runtime       = "python3.8"
+  function_name = "function1"
+  timeout       = 300
+  role          = aws_iam_role.iam_for_lambda.arn
+  layers = [
+    aws_lambda_layer_version.layer1[0].arn,
+  ]
+  depends_on = [
+    null_resource.build_hello_world_lambda_function
+  ]
+}
+
+## /* function1 connected to layer1
+
+## /* layer2
+resource "null_resource" "build_layer2_version" {
+  triggers = {
+    build_number = "${timestamp()}"
+  }
+
+  provisioner "local-exec" {
+    command = "../py_build.sh \"${local.layer1_src_path}\" \"${local.building_path}\" \"${local.layer1_artifact_file_name}\" Layer"
+  }
+}
+
+resource "null_resource" "sam_metadata_aws_lambda_layer_version_layer2" {
+  triggers = {
+    resource_name = "module.layer2.aws_lambda_layer_version.layer"
+    resource_type = "LAMBDA_LAYER"
+
+    original_source_code = local.layer1_src_path
+    built_output_path    = "${local.building_path}/${local.layer1_artifact_file_name}"
+  }
+  depends_on = [
+    null_resource.build_layer2_version
+  ]
+}
+
+module "layer2" {
+  source      = "../modules/lambda_layer"
+  source_code = "${local.building_path}/${local.layer1_artifact_file_name}"
+  name        = "lambda_layer2"
+  depends_on = [
+    null_resource.build_layer2_version
+  ]
+}
+
+## */ layer2
+
+## /* function2 connected to layer2
+
+resource "null_resource" "sam_metadata_aws_lambda_function2" {
+  triggers = {
+    resource_name        = "module.function2.aws_lambda_function.this"
+    resource_type        = "ZIP_LAMBDA_FUNCTION"
+    original_source_code = local.hello_world_function_src_path
+    built_output_path    = "${local.building_path}/${local.hello_world_artifact_file_name}"
+  }
+  depends_on = [
+    null_resource.build_hello_world_lambda_function
+  ]
+}
+
+module "function2" {
+  source        = "../modules/lambda_function"
+  source_code   = "${local.building_path}/${local.hello_world_artifact_file_name}"
+  function_name = "function2"
+  layers        = [module.layer2.arn]
+}
+
+## /* function2 connected to layer2
+
+# serverless.tf 3rd party module
+module "layer7" {
+  source              = "terraform-aws-modules/lambda/aws"
+  version             = "4.6.0"
+  create_layer        = true
+  layer_name          = "lambda_layer7"
+  compatible_runtimes = ["python3.8"]
+  runtime             = "python3.8"
+  source_path = {
+    path             = local.layer1_src_path
+    prefix_in_zip    = "python"
+    pip_requirements = true
+  }
+}
+
+module "function7" {
+  source        = "terraform-aws-modules/lambda/aws"
+  version       = "4.6.0"
+  timeout       = 300
+  source_path   = local.hello_world_function_src_path
+  function_name = "function7"
+  handler       = "app.lambda_handler"
+  runtime       = "python3.8"
+  layers        = [module.layer7.lambda_layer_arn]
+}
\ No newline at end of file
diff --git a/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/src/artifacts/HelloWorldFunction/app.py b/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/src/artifacts/HelloWorldFunction/app.py
new file mode 100644
index 0000000000..3515f894c1
--- /dev/null
+++ b/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/src/artifacts/HelloWorldFunction/app.py
@@ -0,0 +1,11 @@
+import json
+import lib
+import boto3
+
+
+def lambda_handler(event, context):
+    const_value = lib.get_const()
+    return {
+        "statusCode": 200,
+        "body": f"hello world {const_value}",
+    }
diff --git a/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/src/artifacts/HelloWorldFunction/requirements.txt b/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/src/artifacts/HelloWorldFunction/requirements.txt
new file mode 100644
index 0000000000..1db657b6b3
--- /dev/null
+++ b/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/src/artifacts/HelloWorldFunction/requirements.txt
@@ -0,0 +1 @@
+boto3
\ No newline at end of file
diff --git a/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/src/artifacts/layer1/lib.py b/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/src/artifacts/layer1/lib.py
new file mode 100644
index 0000000000..ea3edb4167
--- /dev/null
+++ b/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/src/artifacts/layer1/lib.py
@@ -0,0 +1,4 @@
+import boto3
+
+def get_const():
+    return 1
\ No newline at end of file
diff --git a/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/src/artifacts/layer1/requirements.txt b/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/src/artifacts/layer1/requirements.txt
new file mode 100644
index 0000000000..1db657b6b3
--- /dev/null
+++ b/tests/integration/testdata/buildcmd/terraform/application_outside_root_directory/src/artifacts/layer1/requirements.txt
@@ -0,0 +1 @@
+boto3
\ No newline at end of file