diff --git a/src/spec-configuration/containerFeaturesConfiguration.ts b/src/spec-configuration/containerFeaturesConfiguration.ts
index 5957d0896..141e03d32 100644
--- a/src/spec-configuration/containerFeaturesConfiguration.ts
+++ b/src/spec-configuration/containerFeaturesConfiguration.ts
@@ -843,13 +843,18 @@ export async function processFeatureIdentifier(params: CommonParams, configPath:
 		}
 		const featureFolderPath = path.join(path.dirname(configPath), userFeature.userFeatureId);
 
-		// Ensure we aren't escaping .devcontainer folder
-		const parent = path.join(_workspaceRoot, '.devcontainer');
+		// Ensure we aren't escaping the directory containing the devcontainer config.
+		// The local-features spec resolves paths relative to the config file's directory
+		// (see `featureFolderPath` above), so the escape check must be anchored there
+		// rather than at `${workspaceRoot}/.devcontainer`. Otherwise, configs supplied
+		// via `--config` that live outside the workspace's `.devcontainer/` folder would
+		// reject all of their own sibling features.
+		const parent = path.dirname(configPath);
 		const child = featureFolderPath;
 		const relative = path.relative(parent, child);
 		output.write(`${parent} -> ${child}:   Relative Distance = '${relative}'`, LogLevel.Trace);
 		if (relative.indexOf('..') !== -1) {
-			output.write(`Local file path parse error. Resolved path must be a child of the .devcontainer/ folder.  Parsed: ${featureFolderPath}`, LogLevel.Error);
+			output.write(`Local file path parse error. Resolved path must be a child of the config file's folder.  Parsed: ${featureFolderPath}`, LogLevel.Error);
 			return undefined;
 		}
 
diff --git a/src/test/container-features/featureHelpers.test.ts b/src/test/container-features/featureHelpers.test.ts
index 3e08c0648..67e42ff29 100644
--- a/src/test/container-features/featureHelpers.test.ts
+++ b/src/test/container-features/featureHelpers.test.ts
@@ -188,6 +188,30 @@ describe('validate processFeatureIdentifier', async function () {
 			assert.deepEqual(featureSet?.sourceInformation, { type: 'file-path', resolvedFilePath: path.join(workspaceRoot, '.devcontainer', 'featureB'), userFeatureId: './.devcontainer/featureB' });
 		});
 
+		it('local-path should parse when config file is outside the workspace .devcontainer folder', async function () {
+			// Regression: when `--config` points to a devcontainer.json that lives
+			// outside `${workspaceRoot}/.devcontainer/`, local-path features
+			// resolved relative to that config must still be accepted. Previously
+			// the parent-escape check was anchored at `${workspaceRoot}/.devcontainer`,
+			// which rejected every local feature in this layout.
+			const userFeature: DevContainerFeature = {
+				userFeatureId: './featureA',
+				options: {},
+			};
+
+			const externalConfigDir = '/some/other/place';
+			const customConfigPath = path.join(externalConfigDir, 'devcontainer.json');
+
+			const featureSet = await processFeatureIdentifier(params, customConfigPath, workspaceRoot, userFeature);
+			assert.exists(featureSet);
+			assert.strictEqual(featureSet?.features[0].id, 'featureA');
+			assert.deepEqual(featureSet?.sourceInformation, {
+				type: 'file-path',
+				resolvedFilePath: path.join(externalConfigDir, 'featureA'),
+				userFeatureId: './featureA',
+			});
+		});
+
 		it('should process oci registry (without tag)', async function () {
 			const userFeature: DevContainerFeature = {
 				userFeatureId: 'ghcr.io/codspace/features/ruby',