diff --git a/crates/djls-server/src/workspace/utils.rs b/crates/djls-server/src/workspace/utils.rs
index 08a40ba..60ca51e 100644
--- a/crates/djls-server/src/workspace/utils.rs
+++ b/crates/djls-server/src/workspace/utils.rs
@@ -6,17 +6,35 @@ use tower_lsp_server::lsp_types::Uri;
 
 /// Determines the project root path from initialization parameters.
 ///
-/// Tries the current directory first, then falls back to the first workspace folder.
+/// Prioritizes workspace folders from the LSP client, then falls back
+/// to the current directory if no workspace folders are provided.
 pub fn get_project_path(params: &InitializeParams) -> Option<PathBuf> {
-    // Try current directory first
-    std::env::current_dir().ok().or_else(|| {
-        // Fall back to the first workspace folder URI
-        params
-            .workspace_folders
-            .as_ref()
-            .and_then(|folders| folders.first())
-            .and_then(|folder| uri_to_pathbuf(&folder.uri))
-    })
+    // First try to get the workspace folder from LSP client
+    let workspace_path = params
+        .workspace_folders
+        .as_ref()
+        .and_then(|folders| {
+            tracing::debug!("Found {} workspace folders", folders.len());
+            folders.first()
+        })
+        .and_then(|folder| {
+            tracing::debug!("Processing workspace folder URI: {}", folder.uri.as_str());
+            uri_to_pathbuf(&folder.uri)
+        });
+    
+    if let Some(path) = workspace_path {
+        tracing::info!("Using workspace folder as project path: {}", path.display());
+        return Some(path);
+    }
+    
+    // Fall back to current directory if no workspace folders provided
+    let current_dir = std::env::current_dir().ok();
+    if let Some(ref dir) = current_dir {
+        tracing::info!("No workspace folders provided, using current directory: {}", dir.display());
+    } else {
+        tracing::warn!("No workspace folders and current directory unavailable");
+    }
+    current_dir
 }
 
 /// Converts a `file:` URI into an absolute `PathBuf`.
@@ -41,3 +59,58 @@ fn uri_to_pathbuf(uri: &Uri) -> Option<PathBuf> {
 
     Some(PathBuf::from(path_str))
 }
+
+#[cfg(test)]
+mod tests {
+    use super::*;
+    use tower_lsp_server::lsp_types::WorkspaceFolder;
+
+    #[test]
+    fn test_get_project_path_prefers_workspace_folders() {
+        // Create a mock InitializeParams with workspace folders
+        let workspace_uri: Uri = "file:///workspace/project".parse().unwrap();
+        let workspace_folder = WorkspaceFolder {
+            uri: workspace_uri.clone(),
+            name: "project".to_string(),
+        };
+        
+        let mut params = InitializeParams::default();
+        params.workspace_folders = Some(vec![workspace_folder]);
+        
+        // Get the project path
+        let result = get_project_path(&params);
+        
+        // Should return the workspace folder path, not current_dir
+        assert!(result.is_some());
+        let path = result.unwrap();
+        assert_eq!(path, PathBuf::from("/workspace/project"));
+    }
+
+    #[test]
+    fn test_get_project_path_falls_back_to_current_dir() {
+        // Create InitializeParams without workspace folders
+        let params = InitializeParams::default();
+        
+        // Get the project path
+        let result = get_project_path(&params);
+        
+        // Should return current directory as fallback
+        assert!(result.is_some());
+        let path = result.unwrap();
+        let current = std::env::current_dir().unwrap();
+        assert_eq!(path, current);
+    }
+
+    #[test]
+    fn test_uri_to_pathbuf() {
+        // Test valid file URI
+        let uri: Uri = "file:///home/user/project".parse().unwrap();
+        let result = uri_to_pathbuf(&uri);
+        assert_eq!(result, Some(PathBuf::from("/home/user/project")));
+        
+        // Test non-file URI  
+        let uri: Uri = "https://example.com".parse().unwrap();
+        let result = uri_to_pathbuf(&uri);
+        assert_eq!(result, None);
+    }
+}