diff --git a/CHANGELOG.md b/CHANGELOG.md
index 11efe49d5..758a5fd36 100644
--- a/CHANGELOG.md
+++ b/CHANGELOG.md
@@ -12,6 +12,10 @@
 
 ## [Unreleased]
 
+#### :bug: Bug fix
+
+- Fix rewatch lockfile detection on Windows. https://github.com/rescript-lang/rescript-vscode/pull/1160
+
 #### :nail_care: Polish
 
 - Resolve symlinks when finding platform binaries. https://github.com/rescript-lang/rescript-vscode/pull/1154
diff --git a/server/src/incrementalCompilation.ts b/server/src/incrementalCompilation.ts
index b7e328978..624b3d47e 100644
--- a/server/src/incrementalCompilation.ts
+++ b/server/src/incrementalCompilation.ts
@@ -277,7 +277,7 @@ function triggerIncrementalCompilationOfFile(
     const foundRewatchLockfileInProjectRoot =
       computedWorkspaceRoot == null &&
       projectRootPath != null &&
-      utils.findProjectRootOfFile(projectRootPath, true) != null;
+      utils.findProjectRootOfDir(projectRootPath) != null;
 
     if (foundRewatchLockfileInProjectRoot && debug()) {
       console.log(
diff --git a/server/src/utils.ts b/server/src/utils.ts
index ac47a2c58..a5662cf14 100644
--- a/server/src/utils.ts
+++ b/server/src/utils.ts
@@ -82,9 +82,9 @@ export let createFileInTempDir = (extension = ""): NormalizedPath => {
   return path.join(os.tmpdir(), tempFileName) as NormalizedPath;
 };
 
-let findProjectRootOfFileInDir = (
+function findProjectRootOfFileInDir(
   source: NormalizedPath,
-): NormalizedPath | null => {
+): NormalizedPath | null {
   const dir = normalizePath(path.dirname(source));
   if (dir == null) {
     return null;
@@ -102,18 +102,20 @@ let findProjectRootOfFileInDir = (
       return findProjectRootOfFileInDir(dir);
     }
   }
-};
+}
 
-// TODO: races here?
-export let findProjectRootOfFile = (
+/**
+ * Searches for a project root path in projectsFiles that contains the given file path.
+ * Excludes exact matches - the source must be a file inside a project, not the project root itself.
+ */
+function findProjectRootContainingFile(
   source: NormalizedPath,
-  allowDir?: boolean,
-): NormalizedPath | null => {
-  // First look in project files (keys are already normalized)
+): NormalizedPath | null {
   let foundRootFromProjectFiles: NormalizedPath | null = null;
   for (const rootPath of projectsFiles.keys()) {
     // Both are normalized, so direct comparison works
-    if (source.startsWith(rootPath) && (!allowDir || source !== rootPath)) {
+    // For files, we exclude exact matches (source !== rootPath)
+    if (source.startsWith(rootPath) && source !== rootPath) {
       // Prefer the longest path (most nested)
       if (
         foundRootFromProjectFiles == null ||
@@ -124,20 +126,71 @@ export let findProjectRootOfFile = (
     }
   }
 
-  if (foundRootFromProjectFiles != null) {
-    return foundRootFromProjectFiles;
-  } else {
-    const isDir = path.extname(source) === "";
-    const searchPath =
-      isDir && !allowDir ? path.join(source, "dummy.res") : source;
-    const normalizedSearchPath = normalizePath(searchPath);
-    if (normalizedSearchPath == null) {
-      return null;
+  return foundRootFromProjectFiles;
+}
+
+/**
+ * Searches for a project root path in projectsFiles that matches the given directory path.
+ * Allows exact matches - the source can be the project root directory itself.
+ */
+function findProjectRootMatchingDir(
+  source: NormalizedPath,
+): NormalizedPath | null {
+  let foundRootFromProjectFiles: NormalizedPath | null = null;
+  for (const rootPath of projectsFiles.keys()) {
+    // Both are normalized, so direct comparison works
+    // For directories, we allow exact matches
+    if (source.startsWith(rootPath)) {
+      // Prefer the longest path (most nested)
+      if (
+        foundRootFromProjectFiles == null ||
+        rootPath.length > foundRootFromProjectFiles.length
+      ) {
+        foundRootFromProjectFiles = rootPath;
+      }
     }
-    const foundPath = findProjectRootOfFileInDir(normalizedSearchPath);
-    return foundPath;
   }
-};
+
+  return foundRootFromProjectFiles;
+}
+
+/**
+ * Finds the project root for a given file path.
+ * This is the main function used throughout the codebase for finding project roots.
+ */
+export function findProjectRootOfFile(
+  source: NormalizedPath,
+): NormalizedPath | null {
+  // First look in project files - exclude exact matches since we're looking for a file
+  let foundRoot = findProjectRootContainingFile(source);
+
+  if (foundRoot != null) {
+    return foundRoot;
+  }
+
+  // Fallback: search the filesystem
+  const foundPath = findProjectRootOfFileInDir(source);
+  return foundPath;
+}
+
+/**
+ * Finds the project root for a given directory path.
+ * This allows exact matches and is used for workspace/lockfile detection.
+ */
+export function findProjectRootOfDir(
+  source: NormalizedPath,
+): NormalizedPath | null {
+  // First look in project files - allow exact matches since we're looking for a directory
+  let foundRoot = findProjectRootMatchingDir(source);
+
+  if (foundRoot != null) {
+    return foundRoot;
+  }
+
+  // Fallback: search the filesystem
+  const foundPath = findProjectRootOfFileInDir(source);
+  return foundPath;
+}
 
 /**
  * Gets the project file for a given project root path.
@@ -500,7 +553,7 @@ export function computeWorkspaceRootPathFromLockfile(
   // if we find a rewatch.lock in the project root, it's a compilation of a local package
   // in the workspace.
   return !foundRewatchLockfileInProjectRoot
-    ? findProjectRootOfFile(projectRootPath, true)
+    ? findProjectRootOfDir(projectRootPath)
     : null;
 }