diff --git a/src/Microsoft.Tye.Core/ApplicationFactory.cs b/src/Microsoft.Tye.Core/ApplicationFactory.cs
index 6e7fdc7f2..6280901a0 100644
--- a/src/Microsoft.Tye.Core/ApplicationFactory.cs
+++ b/src/Microsoft.Tye.Core/ApplicationFactory.cs
@@ -100,6 +100,13 @@ bool IsAzureFunctionService(ConfigService service)
                 }
 
                 var sw = Stopwatch.StartNew();
+
+                // This will correctly expand full paths to all service files and projects
+                EvaluatePaths(
+                    configServices: services,
+                    configRoot: config.Source.DirectoryName!,
+                    output: output);
+
                 // Project services will be restored and evaluated before resolving all other services.
                 // This batching will mitigate the performance cost of running MSBuild out of process.
                 var projectServices = services.Where(s => !string.IsNullOrEmpty(s.Project));
@@ -142,6 +149,11 @@ bool IsAzureFunctionService(ConfigService service)
                 {
                     output.WriteDebugLine("Re-evaluating multi-targeted projects");
 
+                    EvaluatePaths(
+                        configServices: multiTFMProjects,
+                        configRoot: config.Source.DirectoryName!,
+                        output: output);
+
                     var multiTFMEvaluationResult = await EvaluateProjectsAsync(
                         projects: multiTFMProjects,
                         configRoot: config.Source.DirectoryName!,
@@ -259,7 +271,7 @@ bool IsAzureFunctionService(ConfigService service)
                             Args = configService.Args,
                             Build = configService.Build ?? true,
                             Replicas = configService.Replicas ?? 1,
-                            DockerFile = Path.Combine(source.DirectoryName!, configService.DockerFile),
+                            DockerFile = Path.Combine(source.DirectoryName!, configService.DockerFileFullPath!),
                             // Supplying an absolute path with trailing slashes fails for DockerFileContext when calling docker build, so trim trailing slash.
                             DockerFileContext = GetDockerFileContext(source, configService),
                             BuildArgs = configService.DockerFileArgs
@@ -503,6 +515,27 @@ service is ProjectServiceBuilder project2 &&
             return root;
         }
 
+        private static void EvaluatePaths(IEnumerable<ConfigService> configServices, string configRoot, OutputContext output)
+        {
+            output.WriteDebugLine("Evaluating configuration paths");
+
+            foreach (var configService in configServices)
+            {
+                if (!string.IsNullOrEmpty(configService.Project))
+                {
+                    configService.ProjectFullPath = Path.Combine(
+                        configRoot,
+                        Environment.ExpandEnvironmentVariables(configService.Project!));
+                }
+                if (!string.IsNullOrEmpty(configService.DockerFile))
+                {
+                    configService.DockerFileFullPath = Path.Combine(
+                        configRoot,
+                        Environment.ExpandEnvironmentVariables(configService.DockerFile!));
+                }
+            }
+        }
+
         private static async Task<ProcessResult> EvaluateProjectsAsync(IEnumerable<ConfigService> projects, string configRoot, OutputContext output)
         {
             using var directory = TempDirectory.Create();
@@ -514,9 +547,6 @@ private static async Task<ProcessResult> EvaluateProjectsAsync(IEnumerable<Confi
 
             foreach (var project in projects)
             {
-                var expandedProject = Environment.ExpandEnvironmentVariables(project.Project!);
-                project.ProjectFullPath = Path.Combine(configRoot, expandedProject);
-
                 if (!File.Exists(project.ProjectFullPath))
                 {
                     throw new CommandException($"Failed to locate project: '{project.ProjectFullPath}'.");
diff --git a/src/Microsoft.Tye.Core/ConfigModel/ConfigService.cs b/src/Microsoft.Tye.Core/ConfigModel/ConfigService.cs
index a131f9372..b28070559 100644
--- a/src/Microsoft.Tye.Core/ConfigModel/ConfigService.cs
+++ b/src/Microsoft.Tye.Core/ConfigModel/ConfigService.cs
@@ -22,6 +22,7 @@ public class ConfigService
         public bool External { get; set; }
         public string? Image { get; set; }
         public string? DockerFile { get; set; }
+        public string? DockerFileFullPath { get; internal set; }
         public Dictionary<string, string> DockerFileArgs { get; set; } = new Dictionary<string, string>();
         public string? DockerFileContext { get; set; }
         public string? Project { get; set; }
diff --git a/test/E2ETest/TyeRunTests.cs b/test/E2ETest/TyeRunTests.cs
index 0f37c4120..465d23ed0 100644
--- a/test/E2ETest/TyeRunTests.cs
+++ b/test/E2ETest/TyeRunTests.cs
@@ -1011,6 +1011,44 @@ public async Task MultiRepo_WorksWithCloning()
             });
         }
 
+        [ConditionalFact]
+        [SkipIfDockerNotRunning]
+        public async Task MultiRepo_WorksWithCloningAndDockerfile()
+        {
+            using var projectDirectory = TempDirectory.Create(preferUserDirectoryOnMacOS: true);
+
+            var content = @"
+name: tye-docker-sample
+services:
+- name: minapp
+  repository: https://github.com/OlegKarasik/tye-docker-sample";
+
+            var yamlFile = Path.Combine(projectDirectory.DirectoryPath, "tye.yaml");
+            var projectFile = new FileInfo(yamlFile);
+            await File.WriteAllTextAsync(yamlFile, content);
+
+            // Debug targets can be null if not specified, so make sure calling host.Start does not throw.
+            var outputContext = new OutputContext(_sink, Verbosity.Debug);
+            var application = await ApplicationFactory.CreateAsync(outputContext, projectFile);
+
+            var handler = new HttpClientHandler
+            {
+                ServerCertificateCustomValidationCallback = (a, b, c, d) => true,
+                AllowAutoRedirect = false
+            };
+
+            var client = new HttpClient(new RetryHandler(handler));
+
+            await RunHostingApplication(application, new HostOptions(), async (app, uri) =>
+            {
+                var appUri = await GetServiceUrl(client, uri, "minapp");
+
+                var appResponse = await client.GetAsync(appUri);
+
+                Assert.True(appResponse.IsSuccessStatusCode);
+            });
+        }
+
         [ConditionalFact]
         [SkipIfDockerNotRunning]
         public async Task DockerFileTest()