diff --git a/src/compiler/commandLineParser.ts b/src/compiler/commandLineParser.ts
index 160debf72e6..5a6ee2ec619 100644
--- a/src/compiler/commandLineParser.ts
+++ b/src/compiler/commandLineParser.ts
@@ -1293,6 +1293,9 @@ namespace ts {
 
         const result = parseJsonText(configFileName, configFileText);
         const cwd = host.getCurrentDirectory();
+        result.path = toPath(configFileName, cwd, createGetCanonicalFileName(host.useCaseSensitiveFileNames));
+        result.resolvedPath = result.path;
+        result.originalFileName = result.fileName;
         return parseJsonSourceFileConfigFileContent(result, host, getNormalizedAbsolutePath(getDirectoryPath(configFileName), cwd), optionsToExtend, getNormalizedAbsolutePath(configFileName, cwd));
     }
 
diff --git a/src/compiler/diagnosticMessages.json b/src/compiler/diagnosticMessages.json
index 65a9e4bafb2..558c45bf2af 100644
--- a/src/compiler/diagnosticMessages.json
+++ b/src/compiler/diagnosticMessages.json
@@ -3763,6 +3763,10 @@
         "category": "Message",
         "code": 6214
     },
+    "Using compiler options of project reference redirect '{0}'.": {
+        "category": "Message",
+        "code": 6215
+    },
 
     "Projects to reference": {
         "category": "Message",
diff --git a/src/compiler/moduleNameResolver.ts b/src/compiler/moduleNameResolver.ts
index 4906abc8f8c..c09c9542055 100644
--- a/src/compiler/moduleNameResolver.ts
+++ b/src/compiler/moduleNameResolver.ts
@@ -258,8 +258,11 @@ namespace ts {
      * This is possible in case if resolution is performed for directives specified via 'types' parameter. In this case initial path for secondary lookups
      * is assumed to be the same as root directory of the project.
      */
-    export function resolveTypeReferenceDirective(typeReferenceDirectiveName: string, containingFile: string | undefined, options: CompilerOptions, host: ModuleResolutionHost): ResolvedTypeReferenceDirectiveWithFailedLookupLocations {
+    export function resolveTypeReferenceDirective(typeReferenceDirectiveName: string, containingFile: string | undefined, options: CompilerOptions, host: ModuleResolutionHost, redirectedReference?: ResolvedProjectReference): ResolvedTypeReferenceDirectiveWithFailedLookupLocations {
         const traceEnabled = isTraceEnabled(options, host);
+        if (redirectedReference) {
+            options = redirectedReference.commandLine.options;
+        }
         const failedLookupLocations: string[] = [];
         const moduleResolutionState: ModuleResolutionState = { compilerOptions: options, host, traceEnabled, failedLookupLocations };
 
@@ -281,6 +284,9 @@ namespace ts {
                     trace(host, Diagnostics.Resolving_type_reference_directive_0_containing_file_1_root_directory_2, typeReferenceDirectiveName, containingFile, typeRoots);
                 }
             }
+            if (redirectedReference) {
+                trace(host, Diagnostics.Using_compiler_options_of_project_reference_redirect_0, redirectedReference.sourceFile.fileName);
+            }
         }
 
         let resolved = primaryLookup();
@@ -339,7 +345,7 @@ namespace ts {
                 }
                 let result: SearchResult<Resolved> | undefined;
                 if (!isExternalModuleNameRelative(typeReferenceDirectiveName)) {
-                    result = loadModuleFromNearestNodeModulesDirectory(Extensions.DtsOnly, typeReferenceDirectiveName, initialLocationForSecondaryLookup, moduleResolutionState, /*cache*/ undefined);
+                    result = loadModuleFromNearestNodeModulesDirectory(Extensions.DtsOnly, typeReferenceDirectiveName, initialLocationForSecondaryLookup, moduleResolutionState, /*cache*/ undefined, /*redirectedReference*/ undefined);
                 }
                 else {
                     const { path: candidate } = normalizePathAndParts(combinePaths(initialLocationForSecondaryLookup, typeReferenceDirectiveName));
@@ -409,7 +415,7 @@ namespace ts {
      * This assumes that any module id will have the same resolution for sibling files located in the same folder.
      */
     export interface ModuleResolutionCache extends NonRelativeModuleNameResolutionCache {
-        getOrCreateCacheForDirectory(directoryName: string): Map<ResolvedModuleWithFailedLookupLocations>;
+        getOrCreateCacheForDirectory(directoryName: string, redirectedReference?: ResolvedProjectReference): Map<ResolvedModuleWithFailedLookupLocations>;
     }
 
     /**
@@ -417,7 +423,7 @@ namespace ts {
      * We support only non-relative module names because resolution of relative module names is usually more deterministic and thus less expensive.
      */
     export interface NonRelativeModuleNameResolutionCache {
-        getOrCreateCacheForModuleName(nonRelativeModuleName: string): PerModuleNameCache;
+        getOrCreateCacheForModuleName(nonRelativeModuleName: string, redirectedReference?: ResolvedProjectReference): PerModuleNameCache;
     }
 
     export interface PerModuleNameCache {
@@ -427,40 +433,78 @@ namespace ts {
 
     export function createModuleResolutionCache(currentDirectory: string, getCanonicalFileName: (s: string) => string): ModuleResolutionCache {
         return createModuleResolutionCacheWithMaps(
-            createMap<Map<ResolvedModuleWithFailedLookupLocations>>(),
-            createMap<PerModuleNameCache>(),
+            createCacheWithRedirects(),
+            createCacheWithRedirects(),
             currentDirectory,
             getCanonicalFileName
         );
     }
 
+    /*@internal*/
+    export interface CacheWithRedirects<T> {
+        ownMap: Map<T>;
+        redirectsMap: Map<Map<T>>;
+        getOrCreateMapOfCacheRedirects(redirectedReference: ResolvedProjectReference | undefined): Map<T>;
+        clear(): void;
+    }
+
+    /*@internal*/
+    export function createCacheWithRedirects<T>(): CacheWithRedirects<T> {
+        const ownMap: Map<T> = createMap();
+        const redirectsMap: Map<Map<T>> = createMap();
+        return {
+            ownMap,
+            redirectsMap,
+            getOrCreateMapOfCacheRedirects,
+            clear
+        };
+
+        function getOrCreateMapOfCacheRedirects(redirectedReference: ResolvedProjectReference | undefined) {
+            if (!redirectedReference) {
+                return ownMap;
+            }
+            const path = redirectedReference.sourceFile.path;
+            let redirects = redirectsMap.get(path);
+            if (!redirects) {
+                redirects = createMap();
+                redirectsMap.set(path, redirects);
+            }
+            return redirects;
+        }
+
+        function clear() {
+            ownMap.clear();
+            redirectsMap.clear();
+        }
+    }
+
     /*@internal*/
     export function createModuleResolutionCacheWithMaps(
-        directoryToModuleNameMap: Map<Map<ResolvedModuleWithFailedLookupLocations>>,
-        moduleNameToDirectoryMap: Map<PerModuleNameCache>,
+        directoryToModuleNameMap: CacheWithRedirects<Map<ResolvedModuleWithFailedLookupLocations>>,
+        moduleNameToDirectoryMap: CacheWithRedirects<PerModuleNameCache>,
         currentDirectory: string,
         getCanonicalFileName: GetCanonicalFileName): ModuleResolutionCache {
 
         return { getOrCreateCacheForDirectory, getOrCreateCacheForModuleName };
 
-        function getOrCreateCacheForDirectory(directoryName: string) {
+        function getOrCreateCacheForDirectory(directoryName: string, redirectedReference?: ResolvedProjectReference) {
             const path = toPath(directoryName, currentDirectory, getCanonicalFileName);
-            let perFolderCache = directoryToModuleNameMap.get(path);
-            if (!perFolderCache) {
-                perFolderCache = createMap<ResolvedModuleWithFailedLookupLocations>();
-                directoryToModuleNameMap.set(path, perFolderCache);
-            }
-            return perFolderCache;
+            return getOrCreateCache<Map<ResolvedModuleWithFailedLookupLocations>>(directoryToModuleNameMap, redirectedReference, path, createMap);
         }
 
-        function getOrCreateCacheForModuleName(nonRelativeModuleName: string): PerModuleNameCache {
+        function getOrCreateCacheForModuleName(nonRelativeModuleName: string, redirectedReference?: ResolvedProjectReference): PerModuleNameCache {
             Debug.assert(!isExternalModuleNameRelative(nonRelativeModuleName));
-            let perModuleNameCache = moduleNameToDirectoryMap.get(nonRelativeModuleName);
-            if (!perModuleNameCache) {
-                perModuleNameCache = createPerModuleNameCache();
-                moduleNameToDirectoryMap.set(nonRelativeModuleName, perModuleNameCache);
+            return getOrCreateCache(moduleNameToDirectoryMap, redirectedReference, nonRelativeModuleName, createPerModuleNameCache);
+        }
+
+        function getOrCreateCache<T>(cacheWithRedirects: CacheWithRedirects<T>, redirectedReference: ResolvedProjectReference | undefined, key: string, create: () => T): T {
+            const cache = cacheWithRedirects.getOrCreateMapOfCacheRedirects(redirectedReference);
+            let result = cache.get(key);
+            if (!result) {
+                result = create();
+                cache.set(key, result);
             }
-            return perModuleNameCache;
+            return result;
         }
 
         function createPerModuleNameCache(): PerModuleNameCache {
@@ -542,13 +586,19 @@ namespace ts {
         return perFolderCache && perFolderCache.get(moduleName);
     }
 
-    export function resolveModuleName(moduleName: string, containingFile: string, compilerOptions: CompilerOptions, host: ModuleResolutionHost, cache?: ModuleResolutionCache): ResolvedModuleWithFailedLookupLocations {
+    export function resolveModuleName(moduleName: string, containingFile: string, compilerOptions: CompilerOptions, host: ModuleResolutionHost, cache?: ModuleResolutionCache, redirectedReference?: ResolvedProjectReference): ResolvedModuleWithFailedLookupLocations {
         const traceEnabled = isTraceEnabled(compilerOptions, host);
+        if (redirectedReference) {
+            compilerOptions = redirectedReference.commandLine.options;
+        }
         if (traceEnabled) {
             trace(host, Diagnostics.Resolving_module_0_from_1, moduleName, containingFile);
+            if (redirectedReference) {
+                trace(host, Diagnostics.Using_compiler_options_of_project_reference_redirect_0, redirectedReference.sourceFile.fileName);
+            }
         }
         const containingDirectory = getDirectoryPath(containingFile);
-        const perFolderCache = cache && cache.getOrCreateCacheForDirectory(containingDirectory);
+        const perFolderCache = cache && cache.getOrCreateCacheForDirectory(containingDirectory, redirectedReference);
         let result = perFolderCache && perFolderCache.get(moduleName);
 
         if (result) {
@@ -572,10 +622,10 @@ namespace ts {
 
             switch (moduleResolution) {
                 case ModuleResolutionKind.NodeJs:
-                    result = nodeModuleNameResolver(moduleName, containingFile, compilerOptions, host, cache);
+                    result = nodeModuleNameResolver(moduleName, containingFile, compilerOptions, host, cache, redirectedReference);
                     break;
                 case ModuleResolutionKind.Classic:
-                    result = classicNameResolver(moduleName, containingFile, compilerOptions, host, cache);
+                    result = classicNameResolver(moduleName, containingFile, compilerOptions, host, cache, redirectedReference);
                     break;
                 default:
                     return Debug.fail(`Unexpected moduleResolution: ${moduleResolution}`);
@@ -585,7 +635,7 @@ namespace ts {
                 perFolderCache.set(moduleName, result);
                 if (!isExternalModuleNameRelative(moduleName)) {
                     // put result in per-module name cache
-                    cache!.getOrCreateCacheForModuleName(moduleName).set(containingDirectory, result);
+                    cache!.getOrCreateCacheForModuleName(moduleName, redirectedReference).set(containingDirectory, result);
                 }
             }
         }
@@ -805,14 +855,14 @@ namespace ts {
     }
 
     function tryResolveJSModuleWorker(moduleName: string, initialDir: string, host: ModuleResolutionHost): ResolvedModuleWithFailedLookupLocations {
-        return nodeModuleNameResolverWorker(moduleName, initialDir, { moduleResolution: ModuleResolutionKind.NodeJs, allowJs: true }, host, /*cache*/ undefined, /*jsOnly*/ true);
+        return nodeModuleNameResolverWorker(moduleName, initialDir, { moduleResolution: ModuleResolutionKind.NodeJs, allowJs: true }, host, /*cache*/ undefined, /*redirectedReference*/ undefined, /*jsOnly*/ true);
     }
 
-    export function nodeModuleNameResolver(moduleName: string, containingFile: string, compilerOptions: CompilerOptions, host: ModuleResolutionHost, cache?: ModuleResolutionCache): ResolvedModuleWithFailedLookupLocations {
-        return nodeModuleNameResolverWorker(moduleName, getDirectoryPath(containingFile), compilerOptions, host, cache, /*jsOnly*/ false);
+    export function nodeModuleNameResolver(moduleName: string, containingFile: string, compilerOptions: CompilerOptions, host: ModuleResolutionHost, cache?: ModuleResolutionCache, redirectedReference?: ResolvedProjectReference): ResolvedModuleWithFailedLookupLocations {
+        return nodeModuleNameResolverWorker(moduleName, getDirectoryPath(containingFile), compilerOptions, host, cache, redirectedReference, /*jsOnly*/ false);
     }
 
-    function nodeModuleNameResolverWorker(moduleName: string, containingDirectory: string, compilerOptions: CompilerOptions, host: ModuleResolutionHost, cache: ModuleResolutionCache | undefined, jsOnly: boolean): ResolvedModuleWithFailedLookupLocations {
+    function nodeModuleNameResolverWorker(moduleName: string, containingDirectory: string, compilerOptions: CompilerOptions, host: ModuleResolutionHost, cache: ModuleResolutionCache | undefined, redirectedReference: ResolvedProjectReference | undefined, jsOnly: boolean): ResolvedModuleWithFailedLookupLocations {
         const traceEnabled = isTraceEnabled(compilerOptions, host);
 
         const failedLookupLocations: string[] = [];
@@ -840,7 +890,7 @@ namespace ts {
                 if (traceEnabled) {
                     trace(host, Diagnostics.Loading_module_0_from_node_modules_folder_target_file_type_1, moduleName, Extensions[extensions]);
                 }
-                const resolved = loadModuleFromNearestNodeModulesDirectory(extensions, moduleName, containingDirectory, state, cache);
+                const resolved = loadModuleFromNearestNodeModulesDirectory(extensions, moduleName, containingDirectory, state, cache, redirectedReference);
                 if (!resolved) return undefined;
 
                 let resolvedValue = resolved.value;
@@ -1178,17 +1228,17 @@ namespace ts {
         return idx === -1 ? { packageName: moduleName, rest: "" } : { packageName: moduleName.slice(0, idx), rest: moduleName.slice(idx + 1) };
     }
 
-    function loadModuleFromNearestNodeModulesDirectory(extensions: Extensions, moduleName: string, directory: string, state: ModuleResolutionState, cache: NonRelativeModuleNameResolutionCache | undefined): SearchResult<Resolved> {
-        return loadModuleFromNearestNodeModulesDirectoryWorker(extensions, moduleName, directory, state, /*typesScopeOnly*/ false, cache);
+    function loadModuleFromNearestNodeModulesDirectory(extensions: Extensions, moduleName: string, directory: string, state: ModuleResolutionState, cache: NonRelativeModuleNameResolutionCache | undefined, redirectedReference: ResolvedProjectReference | undefined): SearchResult<Resolved> {
+        return loadModuleFromNearestNodeModulesDirectoryWorker(extensions, moduleName, directory, state, /*typesScopeOnly*/ false, cache, redirectedReference);
     }
 
     function loadModuleFromNearestNodeModulesDirectoryTypesScope(moduleName: string, directory: string, state: ModuleResolutionState): SearchResult<Resolved> {
         // Extensions parameter here doesn't actually matter, because typesOnly ensures we're just doing @types lookup, which is always DtsOnly.
-        return loadModuleFromNearestNodeModulesDirectoryWorker(Extensions.DtsOnly, moduleName, directory, state, /*typesScopeOnly*/ true, /*cache*/ undefined);
+        return loadModuleFromNearestNodeModulesDirectoryWorker(Extensions.DtsOnly, moduleName, directory, state, /*typesScopeOnly*/ true, /*cache*/ undefined, /*redirectedReference*/ undefined);
     }
 
-    function loadModuleFromNearestNodeModulesDirectoryWorker(extensions: Extensions, moduleName: string, directory: string, state: ModuleResolutionState, typesScopeOnly: boolean, cache: NonRelativeModuleNameResolutionCache | undefined): SearchResult<Resolved> {
-        const perModuleNameCache = cache && cache.getOrCreateCacheForModuleName(moduleName);
+    function loadModuleFromNearestNodeModulesDirectoryWorker(extensions: Extensions, moduleName: string, directory: string, state: ModuleResolutionState, typesScopeOnly: boolean, cache: NonRelativeModuleNameResolutionCache | undefined, redirectedReference: ResolvedProjectReference | undefined): SearchResult<Resolved> {
+        const perModuleNameCache = cache && cache.getOrCreateCacheForModuleName(moduleName, redirectedReference);
         return forEachAncestorDirectory(normalizeSlashes(directory), ancestorDirectory => {
             if (getBaseFileName(ancestorDirectory) !== "node_modules") {
                 const resolutionFromCache = tryFindNonRelativeModuleNameInCache(perModuleNameCache, moduleName, ancestorDirectory, state);
@@ -1356,7 +1406,7 @@ namespace ts {
         }
     }
 
-    export function classicNameResolver(moduleName: string, containingFile: string, compilerOptions: CompilerOptions, host: ModuleResolutionHost, cache?: NonRelativeModuleNameResolutionCache): ResolvedModuleWithFailedLookupLocations {
+    export function classicNameResolver(moduleName: string, containingFile: string, compilerOptions: CompilerOptions, host: ModuleResolutionHost, cache?: NonRelativeModuleNameResolutionCache, redirectedReference?: ResolvedProjectReference): ResolvedModuleWithFailedLookupLocations {
         const traceEnabled = isTraceEnabled(compilerOptions, host);
         const failedLookupLocations: string[] = [];
         const state: ModuleResolutionState = { compilerOptions, host, traceEnabled, failedLookupLocations };
@@ -1373,7 +1423,7 @@ namespace ts {
             }
 
             if (!isExternalModuleNameRelative(moduleName)) {
-                const perModuleNameCache = cache && cache.getOrCreateCacheForModuleName(moduleName);
+                const perModuleNameCache = cache && cache.getOrCreateCacheForModuleName(moduleName, redirectedReference);
                 // Climb up parent directories looking for a module.
                 const resolved = forEachAncestorDirectory(containingDirectory, directory => {
                     const resolutionFromCache = tryFindNonRelativeModuleNameInCache(perModuleNameCache, moduleName, directory, state);
diff --git a/src/compiler/program.ts b/src/compiler/program.ts
index ccec076ce7e..7544b081fcd 100644
--- a/src/compiler/program.ts
+++ b/src/compiler/program.ts
@@ -406,7 +406,7 @@ namespace ts {
         }
     }
 
-    function loadWithLocalCache<T>(names: string[], containingFile: string, loader: (name: string, containingFile: string) => T): T[] {
+    function loadWithLocalCache<T>(names: string[], containingFile: string, redirectedReference: ResolvedProjectReference | undefined, loader: (name: string, containingFile: string, redirectedReference: ResolvedProjectReference | undefined) => T): T[] {
         if (names.length === 0) {
             return [];
         }
@@ -418,7 +418,7 @@ namespace ts {
                 result = cache.get(name)!;
             }
             else {
-                cache.set(name, result = loader(name, containingFile));
+                cache.set(name, result = loader(name, containingFile, redirectedReference));
             }
             resolutions.push(result);
         }
@@ -454,6 +454,8 @@ namespace ts {
             return false;
         }
 
+        let seenResolvedRefs: ResolvedProjectReference[] | undefined;
+
         // If project references dont match
         if (!arrayIsEqualTo(program.getProjectReferences(), projectReferences, projectReferenceUptoDate)) {
             return false;
@@ -485,7 +487,7 @@ namespace ts {
 
         function sourceFileNotUptoDate(sourceFile: SourceFile) {
             return !sourceFileVersionUptoDate(sourceFile) ||
-                hasInvalidatedResolution(sourceFile.resolvedPath);
+                hasInvalidatedResolution(sourceFile.path);
         }
 
         function sourceFileVersionUptoDate(sourceFile: SourceFile) {
@@ -496,11 +498,29 @@ namespace ts {
             if (!projectReferenceIsEqualTo(oldRef, newRef)) {
                 return false;
             }
-            const oldResolvedRef = program!.getResolvedProjectReferences()![index];
+            return resolvedProjectReferenceUptoDate(program!.getResolvedProjectReferences()![index], oldRef);
+        }
+
+        function resolvedProjectReferenceUptoDate(oldResolvedRef: ResolvedProjectReference | undefined, oldRef: ProjectReference): boolean {
             if (oldResolvedRef) {
+                if (contains(seenResolvedRefs, oldResolvedRef)) {
+                    // Assume true
+                    return true;
+                }
+
                 // If sourceFile for the oldResolvedRef existed, check the version for uptodate
-                return sourceFileVersionUptoDate(oldResolvedRef.sourceFile);
+                if (!sourceFileVersionUptoDate(oldResolvedRef.sourceFile)) {
+                    return false;
+                }
+
+                // Add to seen before checking the referenced paths of this config file
+                (seenResolvedRefs || (seenResolvedRefs = [])).push(oldResolvedRef);
+
+                // If child project references are upto date, this project reference is uptodate
+                return !forEach(oldResolvedRef.references, (childResolvedRef, index) =>
+                    !resolvedProjectReferenceUptoDate(childResolvedRef, oldResolvedRef.commandLine.projectReferences![index]));
             }
+
             // In old program, not able to resolve project reference path,
             // so if config file doesnt exist, it is uptodate.
             return !fileExists(resolveProjectReferencePath(oldRef));
@@ -615,13 +635,12 @@ namespace ts {
         // Map storing if there is emit blocking diagnostics for given input
         const hasEmitBlockingDiagnostics = createMap<boolean>();
         let _compilerOptionsObjectLiteralSyntax: ObjectLiteralExpression | null | undefined;
-        let _referencesArrayLiteralSyntax: ArrayLiteralExpression | null | undefined;
 
         let moduleResolutionCache: ModuleResolutionCache | undefined;
-        let resolveModuleNamesWorker: (moduleNames: string[], containingFile: string, reusedNames?: string[]) => ResolvedModuleFull[];
+        let resolveModuleNamesWorker: (moduleNames: string[], containingFile: string, reusedNames?: string[], redirectedReference?: ResolvedProjectReference) => ResolvedModuleFull[];
         const hasInvalidatedResolution = host.hasInvalidatedResolution || returnFalse;
         if (host.resolveModuleNames) {
-            resolveModuleNamesWorker = (moduleNames, containingFile, reusedNames) => host.resolveModuleNames!(Debug.assertEachDefined(moduleNames), containingFile, reusedNames).map(resolved => {
+            resolveModuleNamesWorker = (moduleNames, containingFile, reusedNames, redirectedReference) => host.resolveModuleNames!(Debug.assertEachDefined(moduleNames), containingFile, reusedNames, redirectedReference).map(resolved => {
                 // An older host may have omitted extension, in which case we should infer it from the file extension of resolvedFileName.
                 if (!resolved || (resolved as ResolvedModuleFull).extension !== undefined) {
                     return resolved as ResolvedModuleFull;
@@ -633,17 +652,17 @@ namespace ts {
         }
         else {
             moduleResolutionCache = createModuleResolutionCache(currentDirectory, x => host.getCanonicalFileName(x));
-            const loader = (moduleName: string, containingFile: string) => resolveModuleName(moduleName, containingFile, options, host, moduleResolutionCache).resolvedModule!; // TODO: GH#18217
-            resolveModuleNamesWorker = (moduleNames, containingFile) => loadWithLocalCache<ResolvedModuleFull>(Debug.assertEachDefined(moduleNames), containingFile, loader);
+            const loader = (moduleName: string, containingFile: string, redirectedReference: ResolvedProjectReference | undefined) => resolveModuleName(moduleName, containingFile, options, host, moduleResolutionCache, redirectedReference).resolvedModule!; // TODO: GH#18217
+            resolveModuleNamesWorker = (moduleNames, containingFile, _reusedNames, redirectedReference) => loadWithLocalCache<ResolvedModuleFull>(Debug.assertEachDefined(moduleNames), containingFile, redirectedReference, loader);
         }
 
-        let resolveTypeReferenceDirectiveNamesWorker: (typeDirectiveNames: string[], containingFile: string) => ResolvedTypeReferenceDirective[];
+        let resolveTypeReferenceDirectiveNamesWorker: (typeDirectiveNames: string[], containingFile: string, redirectedReference?: ResolvedProjectReference) => ResolvedTypeReferenceDirective[];
         if (host.resolveTypeReferenceDirectives) {
-            resolveTypeReferenceDirectiveNamesWorker = (typeDirectiveNames, containingFile) => host.resolveTypeReferenceDirectives!(Debug.assertEachDefined(typeDirectiveNames), containingFile);
+            resolveTypeReferenceDirectiveNamesWorker = (typeDirectiveNames, containingFile, redirectedReference) => host.resolveTypeReferenceDirectives!(Debug.assertEachDefined(typeDirectiveNames), containingFile, redirectedReference);
         }
         else {
-            const loader = (typesRef: string, containingFile: string) => resolveTypeReferenceDirective(typesRef, containingFile, options, host).resolvedTypeReferenceDirective!; // TODO: GH#18217
-            resolveTypeReferenceDirectiveNamesWorker = (typeReferenceDirectiveNames, containingFile) => loadWithLocalCache<ResolvedTypeReferenceDirective>(Debug.assertEachDefined(typeReferenceDirectiveNames), containingFile, loader);
+            const loader = (typesRef: string, containingFile: string, redirectedReference: ResolvedProjectReference | undefined) => resolveTypeReferenceDirective(typesRef, containingFile, options, host, redirectedReference).resolvedTypeReferenceDirective!; // TODO: GH#18217
+            resolveTypeReferenceDirectiveNamesWorker = (typeReferenceDirectiveNames, containingFile, redirectedReference) => loadWithLocalCache<ResolvedTypeReferenceDirective>(Debug.assertEachDefined(typeReferenceDirectiveNames), containingFile, redirectedReference, loader);
         }
 
         // Map from a stringified PackageId to the source file with that id.
@@ -662,8 +681,8 @@ namespace ts {
         const filesByNameIgnoreCase = host.useCaseSensitiveFileNames() ? createMap<SourceFile>() : undefined;
 
         // A parallel array to projectReferences storing the results of reading in the referenced tsconfig files
-        let resolvedProjectReferences: (ResolvedProjectReference | undefined)[] | undefined = projectReferences ? [] : undefined;
-        let projectReferenceRedirects: ParsedCommandLine[] | undefined;
+        let resolvedProjectReferences: ReadonlyArray<ResolvedProjectReference | undefined> | undefined;
+        let projectReferenceRedirects: Map<ResolvedProjectReference | false> | undefined;
 
         const shouldCreateNewSourceFile = shouldProgramCreateNewSourceFiles(oldProgram, options);
         const structuralIsReused = tryReuseStructureFromOldProgram();
@@ -672,16 +691,16 @@ namespace ts {
             processingOtherFiles = [];
 
             if (projectReferences) {
-                for (const ref of projectReferences) {
-                    const parsedRef = parseProjectReferenceConfigFile(ref);
-                    resolvedProjectReferences!.push(parsedRef);
+                if (!resolvedProjectReferences) {
+                    resolvedProjectReferences = projectReferences.map(parseProjectReferenceConfigFile);
+                }
+                for (const parsedRef of resolvedProjectReferences) {
                     if (parsedRef) {
                         const out = parsedRef.commandLine.options.outFile || parsedRef.commandLine.options.out;
                         if (out) {
                             const dtsOutfile = changeExtension(out, ".d.ts");
                             processSourceFile(dtsOutfile, /*isDefaultLib*/ false, /*ignoreNoDefaultLib*/ false, /*packageId*/ undefined);
                         }
-                        addProjectReferenceRedirects(parsedRef.commandLine);
                     }
                 }
             }
@@ -732,10 +751,18 @@ namespace ts {
         if (oldProgram && host.onReleaseOldSourceFile) {
             const oldSourceFiles = oldProgram.getSourceFiles();
             for (const oldSourceFile of oldSourceFiles) {
-                if (!getSourceFile(oldSourceFile.path) || shouldCreateNewSourceFile) {
-                    host.onReleaseOldSourceFile(oldSourceFile, oldProgram.getCompilerOptions());
+                const newFile = getSourceFileByPath(oldSourceFile.resolvedPath);
+                if (shouldCreateNewSourceFile || !newFile ||
+                    // old file wasnt redirect but new file is
+                    (oldSourceFile.resolvedPath === oldSourceFile.path && newFile.resolvedPath !== oldSourceFile.path)) {
+                    host.onReleaseOldSourceFile(oldSourceFile, oldProgram.getCompilerOptions(), !!getSourceFileByPath(oldSourceFile.path));
                 }
             }
+            oldProgram.forEachResolvedProjectReference((resolvedProjectReference, resolvedProjectReferencePath) => {
+                if (resolvedProjectReference && !getResolvedProjectReferenceByPath(resolvedProjectReferencePath)) {
+                    host.onReleaseOldSourceFile!(resolvedProjectReference.sourceFile, oldProgram!.getCompilerOptions(), /*hasSourceFileByPath*/ false);
+                }
+            });
         }
 
         // unconditionally set oldProgram to undefined to prevent it from being captured in closure
@@ -778,7 +805,10 @@ namespace ts {
             getResolvedModuleWithFailedLookupLocationsFromCache,
             getProjectReferences,
             getResolvedProjectReferences,
-            getProjectReferenceRedirect
+            getProjectReferenceRedirect,
+            getResolvedProjectReferenceToRedirect,
+            getResolvedProjectReferenceByPath,
+            forEachResolvedProjectReference
         };
 
         verifyCompilerOptions();
@@ -861,7 +891,7 @@ namespace ts {
             if (structuralIsReused === StructureIsReused.Not && !file.ambientModuleNames.length) {
                 // If the old program state does not permit reusing resolutions and `file` does not contain locally defined ambient modules,
                 // the best we can do is fallback to the default logic.
-                return resolveModuleNamesWorker(moduleNames, containingFile);
+                return resolveModuleNamesWorker(moduleNames, containingFile, /*reusedNames*/ undefined, getResolvedProjectReferenceToRedirect(file.originalFileName));
             }
 
             const oldSourceFile = oldProgramState.program && oldProgramState.program.getSourceFile(containingFile);
@@ -941,7 +971,7 @@ namespace ts {
             }
 
             const resolutions = unknownModuleNames && unknownModuleNames.length
-                ? resolveModuleNamesWorker(unknownModuleNames, containingFile, reusedNames)
+                ? resolveModuleNamesWorker(unknownModuleNames, containingFile, reusedNames, getResolvedProjectReferenceToRedirect(file.originalFileName))
                 : emptyArray;
 
             // Combine results of resolutions and predicted results
@@ -1001,6 +1031,30 @@ namespace ts {
             }
         }
 
+        function canReuseProjectReferences(): boolean {
+            return !forEachProjectReference(
+                oldProgram!.getProjectReferences(),
+                oldProgram!.getResolvedProjectReferences(),
+                (oldResolvedRef, index, parent) => {
+                    const newRef = (parent ? parent.commandLine.projectReferences : projectReferences)![index];
+                    const newResolvedRef = parseProjectReferenceConfigFile(newRef);
+                    if (oldResolvedRef) {
+                        // Resolved project reference has gone missing or changed
+                        return !newResolvedRef || newResolvedRef.sourceFile !== oldResolvedRef.sourceFile;
+                    }
+                    else {
+                        // A previously-unresolved reference may be resolved now
+                        return newResolvedRef !== undefined;
+                    }
+                },
+                (oldProjectReferences, parent) => {
+                    // If array of references is changed, we cant resue old program
+                    const newReferences = parent ? getResolvedProjectReferenceByPath(parent.sourceFile.path)!.commandLine.projectReferences : projectReferences;
+                    return !arrayIsEqualTo(oldProjectReferences, newReferences, projectReferenceIsEqualTo);
+                }
+            );
+        }
+
         function tryReuseStructureFromOldProgram(): StructureIsReused {
             if (!oldProgram) {
                 return StructureIsReused.Not;
@@ -1026,43 +1080,15 @@ namespace ts {
             }
 
             // Check if any referenced project tsconfig files are different
-
-            // If array of references is changed, we cant resue old program
-            const oldProjectReferences = oldProgram.getProjectReferences();
-            if (!arrayIsEqualTo(oldProjectReferences!, projectReferences, projectReferenceIsEqualTo)) {
+            if (!canReuseProjectReferences()) {
                 return oldProgram.structureIsReused = StructureIsReused.Not;
             }
-
-            // Check the json files for the project references
-            const oldRefs = oldProgram.getResolvedProjectReferences();
             if (projectReferences) {
-                // Resolved project referenced should be array if projectReferences provided are array
-                Debug.assert(!!oldRefs);
-                for (let i = 0; i < projectReferences.length; i++) {
-                    const oldRef = oldRefs![i];
-                    const newRef = parseProjectReferenceConfigFile(projectReferences[i]);
-                    if (oldRef) {
-                        if (!newRef || newRef.sourceFile !== oldRef.sourceFile) {
-                            // Resolved project reference has gone missing or changed
-                            return oldProgram.structureIsReused = StructureIsReused.Not;
-                        }
-                    }
-                    else {
-                        // A previously-unresolved reference may be resolved now
-                        if (newRef !== undefined) {
-                            return oldProgram.structureIsReused = StructureIsReused.Not;
-                        }
-                    }
-                }
-            }
-            else {
-                // Resolved project referenced should be undefined if projectReferences is undefined
-                Debug.assert(!oldRefs);
+                resolvedProjectReferences = projectReferences.map(parseProjectReferenceConfigFile);
             }
 
             // check if program source files has changed in the way that can affect structure of the program
             const newSourceFiles: SourceFile[] = [];
-            const filePaths: Path[] = [];
             const modifiedSourceFiles: { oldFile: SourceFile, newFile: SourceFile }[] = [];
             oldProgram.structureIsReused = StructureIsReused.Completely;
 
@@ -1115,7 +1141,6 @@ namespace ts {
                 newSourceFile.originalFileName = oldSourceFile.originalFileName;
                 newSourceFile.resolvedPath = oldSourceFile.resolvedPath;
                 newSourceFile.fileName = oldSourceFile.fileName;
-                filePaths.push(newSourceFile.path);
 
                 const packageName = oldProgram.sourceFileToPackageName.get(oldSourceFile.path);
                 if (packageName !== undefined) {
@@ -1209,7 +1234,7 @@ namespace ts {
                 if (resolveTypeReferenceDirectiveNamesWorker) {
                     // We lower-case all type references because npm automatically lowercases all packages. See GH#9824.
                     const typesReferenceDirectives = map(newSourceFile.typeReferenceDirectives, ref => ref.fileName.toLocaleLowerCase());
-                    const resolutions = resolveTypeReferenceDirectiveNamesWorker(typesReferenceDirectives, newSourceFilePath);
+                    const resolutions = resolveTypeReferenceDirectiveNamesWorker(typesReferenceDirectives, newSourceFilePath, getResolvedProjectReferenceToRedirect(newSourceFile.originalFileName));
                     // ensure that types resolutions are still correct
                     const resolutionsChanged = hasChangesInResolutions(typesReferenceDirectives, resolutions, oldSourceFile.resolvedTypeReferenceDirectiveNames, typeDirectiveIsEqualTo);
                     if (resolutionsChanged) {
@@ -1233,11 +1258,12 @@ namespace ts {
             missingFilePaths = oldProgram.getMissingFilePaths();
 
             // update fileName -> file mapping
-            for (let i = 0; i < newSourceFiles.length; i++) {
-                filesByName.set(filePaths[i], newSourceFiles[i]);
+            for (const newSourceFile of newSourceFiles) {
+                const filePath = newSourceFile.path;
+                addFileToFilesByName(newSourceFile, filePath, newSourceFile.resolvedPath);
                 // Set the file as found during node modules search if it was found that way in old progra,
-                if (oldProgram.isSourceFileFromExternalLibrary(oldProgram.getSourceFileByPath(filePaths[i])!)) {
-                    sourceFilesFoundSearchingNodeModules.set(filePaths[i], true);
+                if (oldProgram.isSourceFileFromExternalLibrary(oldProgram.getSourceFileByPath(filePath)!)) {
+                    sourceFilesFoundSearchingNodeModules.set(filePath, true);
                 }
             }
 
@@ -1248,14 +1274,6 @@ namespace ts {
                 fileProcessingDiagnostics.reattachFileDiagnostics(modifiedFile.newFile);
             }
             resolvedTypeReferenceDirectives = oldProgram.getResolvedTypeReferenceDirectives();
-            resolvedProjectReferences = oldProgram.getResolvedProjectReferences();
-            if (resolvedProjectReferences) {
-                resolvedProjectReferences.forEach(ref => {
-                    if (ref) {
-                        addProjectReferenceRedirects(ref.commandLine);
-                    }
-                });
-            }
 
             sourceFileToPackageName = oldProgram.sourceFileToPackageName;
             redirectTargetsMap = oldProgram.redirectTargetsMap;
@@ -1810,11 +1828,22 @@ namespace ts {
                 fileProcessingDiagnostics.getGlobalDiagnostics(),
                 concatenate(
                     programDiagnostics.getGlobalDiagnostics(),
-                    options.configFile ? programDiagnostics.getDiagnostics(options.configFile.fileName) : []
+                    getOptionsDiagnosticsOfConfigFile()
                 )
             ));
         }
 
+        function getOptionsDiagnosticsOfConfigFile() {
+            if (!options.configFile) { return emptyArray; }
+            let diagnostics = programDiagnostics.getDiagnostics(options.configFile.fileName);
+            forEachResolvedProjectReference(resolvedRef => {
+                if (resolvedRef) {
+                    diagnostics = concatenate(diagnostics, programDiagnostics.getDiagnostics(resolvedRef.sourceFile.fileName));
+                }
+            });
+            return diagnostics;
+        }
+
         function getGlobalDiagnostics(): Diagnostic[] {
             return sortAndDeduplicateDiagnostics(getDiagnosticsProducingTypeChecker().getGlobalDiagnostics().slice());
         }
@@ -2089,7 +2118,7 @@ namespace ts {
                 return file;
             }
 
-            let redirectedPath: string | undefined;
+            let redirectedPath: Path | undefined;
             if (refFile) {
                 const redirect = getProjectReferenceRedirect(fileName);
                 if (redirect) {
@@ -2123,7 +2152,7 @@ namespace ts {
                     // Instead of creating a duplicate, just redirect to the existing one.
                     const dupFile = createRedirectSourceFile(fileFromPackageId, file!, fileName, path, toPath(fileName), originalFileName); // TODO: GH#18217
                     redirectTargetsMap.add(fileFromPackageId.path, fileName);
-                    filesByName.set(path, dupFile);
+                    addFileToFilesByName(dupFile, path, redirectedPath);
                     sourceFileToPackageName.set(path, packageId.name);
                     processingOtherFiles!.push(dupFile);
                     return dupFile;
@@ -2134,11 +2163,7 @@ namespace ts {
                     sourceFileToPackageName.set(path, packageId.name);
                 }
             }
-
-            filesByName.set(path, file);
-            if (redirectedPath) {
-                filesByName.set(redirectedPath, file);
-            }
+            addFileToFilesByName(file, path, redirectedPath);
 
             if (file) {
                 sourceFilesFoundSearchingNodeModules.set(path, currentNodeModulesDepth > 0);
@@ -2181,27 +2206,109 @@ namespace ts {
             return file;
         }
 
+        function addFileToFilesByName(file: SourceFile | undefined, path: Path, redirectedPath: Path | undefined) {
+            filesByName.set(path, file);
+            if (redirectedPath) {
+                filesByName.set(redirectedPath, file);
+            }
+        }
+
         function getProjectReferenceRedirect(fileName: string): string | undefined {
             // Ignore dts or any of the non ts files
-            if (!projectReferenceRedirects || fileExtensionIs(fileName, Extension.Dts) || !fileExtensionIsOneOf(fileName, supportedTSExtensions)) {
+            if (!resolvedProjectReferences || !resolvedProjectReferences.length || fileExtensionIs(fileName, Extension.Dts) || !fileExtensionIsOneOf(fileName, supportedTSExtensions)) {
                 return undefined;
             }
 
             // If this file is produced by a referenced project, we need to rewrite it to
             // look in the output folder of the referenced project rather than the input
-            return forEach(projectReferenceRedirects, referencedProject => {
+            const referencedProject = getResolvedProjectReferenceToRedirect(fileName);
+            if (!referencedProject) {
+                return undefined;
+            }
+
+            const out = referencedProject.commandLine.options.outFile || referencedProject.commandLine.options.out;
+            return out ?
+                changeExtension(out, Extension.Dts) :
+                getOutputDeclarationFileName(fileName, referencedProject.commandLine);
+        }
+
+        /**
+         * Get the referenced project if the file is input file from that reference project
+         */
+        function getResolvedProjectReferenceToRedirect(fileName: string) {
+            return forEachResolvedProjectReference((referencedProject, referenceProjectPath) => {
                 // not input file from the referenced project, ignore
-                if (!contains(referencedProject.fileNames, fileName, isSameFile)) {
+                if (!referencedProject ||
+                    toPath(options.configFilePath!) === referenceProjectPath ||
+                    !contains(referencedProject.commandLine.fileNames, fileName, isSameFile)) {
                     return undefined;
                 }
 
-                const out = referencedProject.options.outFile || referencedProject.options.out;
-                return out ?
-                    changeExtension(out, Extension.Dts) :
-                    getOutputDeclarationFileName(fileName, referencedProject);
+                return referencedProject;
             });
         }
 
+        function forEachResolvedProjectReference<T>(
+            cb: (resolvedProjectReference: ResolvedProjectReference | undefined, resolvedProjectReferencePath: Path) => T | undefined
+        ): T | undefined {
+            return forEachProjectReference(projectReferences, resolvedProjectReferences, (resolvedRef, index, parent) => {
+                const ref = (parent ? parent.commandLine.projectReferences : projectReferences)![index];
+                const resolvedRefPath = toPath(resolveProjectReferencePath(ref));
+                return cb(resolvedRef, resolvedRefPath);
+            });
+        }
+
+        function forEachProjectReference<T>(
+            projectReferences: ReadonlyArray<ProjectReference> | undefined,
+            resolvedProjectReferences: ReadonlyArray<ResolvedProjectReference | undefined> | undefined,
+            cbResolvedRef: (resolvedRef: ResolvedProjectReference | undefined, index: number, parent: ResolvedProjectReference | undefined) => T | undefined,
+            cbRef?: (projectReferences: ReadonlyArray<ProjectReference> | undefined, parent: ResolvedProjectReference | undefined) => T | undefined
+        ): T | undefined {
+            let seenResolvedRefs: ResolvedProjectReference[] | undefined;
+
+            return worker(projectReferences, resolvedProjectReferences, /*parent*/ undefined, cbResolvedRef, cbRef);
+
+            function worker(
+                projectReferences: ReadonlyArray<ProjectReference> | undefined,
+                resolvedProjectReferences: ReadonlyArray<ResolvedProjectReference | undefined> | undefined,
+                parent: ResolvedProjectReference | undefined,
+                cbResolvedRef: (resolvedRef: ResolvedProjectReference | undefined, index: number, parent: ResolvedProjectReference | undefined) => T | undefined,
+                cbRef?: (projectReferences: ReadonlyArray<ProjectReference> | undefined, parent: ResolvedProjectReference | undefined) => T | undefined,
+            ): T | undefined {
+
+                // Visit project references first
+                if (cbRef) {
+                    const result = cbRef(projectReferences, parent);
+                    if (result) { return result; }
+                }
+
+                return forEach(resolvedProjectReferences, (resolvedRef, index) => {
+                    if (contains(seenResolvedRefs, resolvedRef)) {
+                        // ignore recursives
+                        return undefined;
+                    }
+
+                    const result = cbResolvedRef(resolvedRef, index, parent);
+                    if (result) {
+                        return result;
+                    }
+
+                    if (!resolvedRef) return undefined;
+
+                    (seenResolvedRefs || (seenResolvedRefs = [])).push(resolvedRef);
+                    return worker(resolvedRef.commandLine.projectReferences, resolvedRef.references, resolvedRef, cbResolvedRef, cbRef);
+                });
+            }
+        }
+
+        function getResolvedProjectReferenceByPath(projectReferencePath: Path): ResolvedProjectReference | undefined {
+            if (!projectReferenceRedirects) {
+                return undefined;
+            }
+
+            return projectReferenceRedirects.get(projectReferencePath) || undefined;
+        }
+
         function processReferencedFiles(file: SourceFile, isDefaultLib: boolean) {
             forEach(file.referencedFiles, ref => {
                 const referencedFileName = resolveTripleslashReference(ref.fileName, file.originalFileName);
@@ -2216,7 +2323,7 @@ namespace ts {
                 return;
             }
 
-            const resolutions = resolveTypeReferenceDirectiveNamesWorker(typeDirectives, file.originalFileName);
+            const resolutions = resolveTypeReferenceDirectiveNamesWorker(typeDirectives, file.originalFileName, getResolvedProjectReferenceToRedirect(file.originalFileName));
 
             for (let i = 0; i < typeDirectives.length; i++) {
                 const ref = file.typeReferenceDirectives[i];
@@ -2389,22 +2496,37 @@ namespace ts {
             return allFilesBelongToPath;
         }
 
-        function parseProjectReferenceConfigFile(ref: ProjectReference): { commandLine: ParsedCommandLine, sourceFile: SourceFile } | undefined {
+        function parseProjectReferenceConfigFile(ref: ProjectReference): ResolvedProjectReference | undefined {
+            if (!projectReferenceRedirects) {
+                projectReferenceRedirects = createMap<ResolvedProjectReference | false>();
+            }
+
             // The actual filename (i.e. add "/tsconfig.json" if necessary)
             const refPath = resolveProjectReferencePath(ref);
+            const sourceFilePath = toPath(refPath);
+            const fromCache = projectReferenceRedirects.get(sourceFilePath);
+            if (fromCache !== undefined) {
+                return fromCache || undefined;
+            }
+
             // An absolute path pointing to the containing directory of the config file
             const basePath = getNormalizedAbsolutePath(getDirectoryPath(refPath), host.getCurrentDirectory());
             const sourceFile = host.getSourceFile(refPath, ScriptTarget.JSON) as JsonSourceFile | undefined;
+            addFileToFilesByName(sourceFile, sourceFilePath, /*redirectedPath*/ undefined);
             if (sourceFile === undefined) {
+                projectReferenceRedirects.set(sourceFilePath, false);
                 return undefined;
             }
-            sourceFile.path = toPath(refPath);
+            sourceFile.path = sourceFilePath;
+            sourceFile.resolvedPath = sourceFilePath;
+            sourceFile.originalFileName = refPath;
             const commandLine = parseJsonSourceFileConfigFileContent(sourceFile, configParsingHost, basePath, /*existingOptions*/ undefined, refPath);
-            return { commandLine, sourceFile };
-        }
-
-        function addProjectReferenceRedirects(referencedProject: ParsedCommandLine) {
-            (projectReferenceRedirects || (projectReferenceRedirects = [])).push(referencedProject);
+            const resolvedRef: ResolvedProjectReference = { commandLine, sourceFile };
+            projectReferenceRedirects.set(sourceFilePath, resolvedRef);
+            if (commandLine.projectReferences) {
+                resolvedRef.references = commandLine.projectReferences.map(parseProjectReferenceConfigFile);
+            }
+            return resolvedRef;
         }
 
         function verifyCompilerOptions() {
@@ -2449,30 +2571,7 @@ namespace ts {
                 }
             }
 
-            if (projectReferences) {
-                for (let i = 0; i < projectReferences.length; i++) {
-                    const ref = projectReferences[i];
-                    const resolvedRefOpts = resolvedProjectReferences![i] && resolvedProjectReferences![i]!.commandLine.options;
-                    if (resolvedRefOpts === undefined) {
-                        createDiagnosticForReference(i, Diagnostics.File_0_does_not_exist, ref.path);
-                        continue;
-                    }
-                    if (!resolvedRefOpts.composite) {
-                        createDiagnosticForReference(i, Diagnostics.Referenced_project_0_must_have_setting_composite_Colon_true, ref.path);
-                    }
-                    if (ref.prepend) {
-                        const out = resolvedRefOpts.outFile || resolvedRefOpts.out;
-                        if (out) {
-                            if (!host.fileExists(out)) {
-                                createDiagnosticForReference(i, Diagnostics.Output_file_0_from_project_1_does_not_exist, out, ref.path);
-                            }
-                        }
-                        else {
-                            createDiagnosticForReference(i, Diagnostics.Cannot_prepend_project_0_because_it_does_not_have_outFile_set, ref.path);
-                        }
-                    }
-                }
-            }
+            verifyProjectReferences();
 
             // List of collected files is complete; validate exhautiveness if this is a project with a file list
             if (options.composite) {
@@ -2690,6 +2789,32 @@ namespace ts {
             }
         }
 
+        function verifyProjectReferences() {
+            forEachProjectReference(projectReferences, resolvedProjectReferences, (resolvedRef, index, parent) => {
+                const ref = (parent ? parent.commandLine.projectReferences : projectReferences)![index];
+                const parentFile = parent && parent.sourceFile as JsonSourceFile;
+                if (!resolvedRef) {
+                    createDiagnosticForReference(parentFile, index, Diagnostics.File_0_not_found, ref.path);
+                    return;
+                }
+                const options = resolvedRef.commandLine.options;
+                if (!options.composite) {
+                    createDiagnosticForReference(parentFile, index, Diagnostics.Referenced_project_0_must_have_setting_composite_Colon_true, ref.path);
+                }
+                if (ref.prepend) {
+                    const out = options.outFile || options.out;
+                    if (out) {
+                        if (!host.fileExists(out)) {
+                            createDiagnosticForReference(parentFile, index, Diagnostics.Output_file_0_from_project_1_does_not_exist, out, ref.path);
+                        }
+                    }
+                    else {
+                        createDiagnosticForReference(parentFile, index, Diagnostics.Cannot_prepend_project_0_because_it_does_not_have_outFile_set, ref.path);
+                    }
+                }
+            });
+        }
+
         function createDiagnosticForOptionPathKeyValue(key: string, valueIndex: number, message: DiagnosticMessage, arg0: string | number, arg1: string | number, arg2?: string | number) {
             let needCompilerDiagnostic = true;
             const pathsSyntax = getOptionPathsSyntax();
@@ -2746,10 +2871,11 @@ namespace ts {
             createDiagnosticForOption(/*onKey*/ false, option1, /*option2*/ undefined, message, arg0);
         }
 
-        function createDiagnosticForReference(index: number, message: DiagnosticMessage, arg0?: string | number, arg1?: string | number) {
-            const referencesSyntax = getProjectReferencesSyntax();
+        function createDiagnosticForReference(sourceFile: JsonSourceFile | undefined, index: number, message: DiagnosticMessage, arg0?: string | number, arg1?: string | number) {
+            const referencesSyntax = firstDefined(getTsConfigPropArray(sourceFile || options.configFile, "references"),
+                property => isArrayLiteralExpression(property.initializer) ? property.initializer : undefined);
             if (referencesSyntax && referencesSyntax.elements.length > index) {
-                programDiagnostics.add(createDiagnosticForNodeInSourceFile(options.configFile!, referencesSyntax.elements[index], message, arg0, arg1));
+                programDiagnostics.add(createDiagnosticForNodeInSourceFile(sourceFile || options.configFile!, referencesSyntax.elements[index], message, arg0, arg1));
             }
             else {
                 programDiagnostics.add(createCompilerDiagnostic(message, arg0, arg1));
@@ -2766,22 +2892,6 @@ namespace ts {
             }
         }
 
-        function getProjectReferencesSyntax(): ArrayLiteralExpression | null {
-            if (_referencesArrayLiteralSyntax === undefined) {
-                _referencesArrayLiteralSyntax = null; // tslint:disable-line:no-null-keyword
-                if (options.configFile) {
-                    const jsonObjectLiteral = getTsConfigObjectLiteralExpression(options.configFile)!; // TODO: GH#18217
-                    for (const prop of getPropertyAssignment(jsonObjectLiteral, "references")) {
-                        if (isArrayLiteralExpression(prop.initializer)) {
-                            _referencesArrayLiteralSyntax = prop.initializer;
-                            break;
-                        }
-                    }
-                }
-            }
-            return _referencesArrayLiteralSyntax;
-        }
-
         function getCompilerOptionsObjectLiteralSyntax() {
             if (_compilerOptionsObjectLiteralSyntax === undefined) {
                 _compilerOptionsObjectLiteralSyntax = null; // tslint:disable-line:no-null-keyword
diff --git a/src/compiler/resolutionCache.ts b/src/compiler/resolutionCache.ts
index 84b5d8e0a85..b462ab96b1a 100644
--- a/src/compiler/resolutionCache.ts
+++ b/src/compiler/resolutionCache.ts
@@ -5,12 +5,13 @@ namespace ts {
         startRecordingFilesWithChangedResolutions(): void;
         finishRecordingFilesWithChangedResolutions(): Path[] | undefined;
 
-        resolveModuleNames(moduleNames: string[], containingFile: string, reusedNames: string[] | undefined): ResolvedModuleFull[];
+        resolveModuleNames(moduleNames: string[], containingFile: string, reusedNames: string[] | undefined, redirectedReference?: ResolvedProjectReference): ResolvedModuleFull[];
         getResolvedModuleWithFailedLookupLocationsFromCache(moduleName: string, containingFile: string): CachedResolvedModuleWithFailedLookupLocations | undefined;
-        resolveTypeReferenceDirectives(typeDirectiveNames: string[], containingFile: string): ResolvedTypeReferenceDirective[];
+        resolveTypeReferenceDirectives(typeDirectiveNames: string[], containingFile: string, redirectedReference?: ResolvedProjectReference): ResolvedTypeReferenceDirective[];
 
         invalidateResolutionOfFile(filePath: Path): void;
         removeResolutionsOfFile(filePath: Path): void;
+        removeResolutionsFromProjectReferenceRedirects(filePath: Path): void;
         setFilesWithInvalidatedNonRelativeUnresolvedImports(filesWithUnresolvedImports: Map<ReadonlyArray<string>>): void;
         createHasInvalidatedResolution(forceAllFilesAsInvalidated?: boolean): HasInvalidatedResolution;
 
@@ -90,17 +91,17 @@ namespace ts {
         // The key in the map is source file's path.
         // The values are Map of resolutions with key being name lookedup.
         const resolvedModuleNames = createMap<Map<CachedResolvedModuleWithFailedLookupLocations>>();
-        const perDirectoryResolvedModuleNames = createMap<Map<CachedResolvedModuleWithFailedLookupLocations>>();
-        const nonRelaticeModuleNameCache = createMap<PerModuleNameCache>();
+        const perDirectoryResolvedModuleNames: CacheWithRedirects<Map<CachedResolvedModuleWithFailedLookupLocations>> = createCacheWithRedirects();
+        const nonRelativeModuleNameCache: CacheWithRedirects<PerModuleNameCache> = createCacheWithRedirects();
         const moduleResolutionCache = createModuleResolutionCacheWithMaps(
             perDirectoryResolvedModuleNames,
-            nonRelaticeModuleNameCache,
+            nonRelativeModuleNameCache,
             getCurrentDirectory(),
             resolutionHost.getCanonicalFileName
         );
 
         const resolvedTypeReferenceDirectives = createMap<Map<CachedResolvedTypeReferenceDirectiveWithFailedLookupLocations>>();
-        const perDirectoryResolvedTypeReferenceDirectives = createMap<Map<CachedResolvedTypeReferenceDirectiveWithFailedLookupLocations>>();
+        const perDirectoryResolvedTypeReferenceDirectives: CacheWithRedirects<Map<CachedResolvedTypeReferenceDirectiveWithFailedLookupLocations>> = createCacheWithRedirects();
 
         /**
          * These are the extensions that failed lookup files will have by default,
@@ -128,6 +129,7 @@ namespace ts {
             resolveModuleNames,
             getResolvedModuleWithFailedLookupLocationsFromCache,
             resolveTypeReferenceDirectives,
+            removeResolutionsFromProjectReferenceRedirects,
             removeResolutionsOfFile,
             invalidateResolutionOfFile,
             setFilesWithInvalidatedNonRelativeUnresolvedImports,
@@ -199,7 +201,7 @@ namespace ts {
 
         function clearPerDirectoryResolutions() {
             perDirectoryResolvedModuleNames.clear();
-            nonRelaticeModuleNameCache.clear();
+            nonRelativeModuleNameCache.clear();
             perDirectoryResolvedTypeReferenceDirectives.clear();
             nonRelativeExternalModuleResolutions.forEach(watchFailedLookupLocationOfNonRelativeModuleResolutions);
             nonRelativeExternalModuleResolutions.clear();
@@ -217,8 +219,8 @@ namespace ts {
             });
         }
 
-        function resolveModuleName(moduleName: string, containingFile: string, compilerOptions: CompilerOptions, host: ModuleResolutionHost): CachedResolvedModuleWithFailedLookupLocations {
-            const primaryResult = ts.resolveModuleName(moduleName, containingFile, compilerOptions, host, moduleResolutionCache);
+        function resolveModuleName(moduleName: string, containingFile: string, compilerOptions: CompilerOptions, host: ModuleResolutionHost, redirectedReference?: ResolvedProjectReference): CachedResolvedModuleWithFailedLookupLocations {
+            const primaryResult = ts.resolveModuleName(moduleName, containingFile, compilerOptions, host, moduleResolutionCache, redirectedReference);
             // return result immediately only if global cache support is not enabled or if it is .ts, .tsx or .d.ts
             if (!resolutionHost.getGlobalCache) {
                 return primaryResult;
@@ -242,9 +244,10 @@ namespace ts {
         function resolveNamesWithLocalCache<T extends ResolutionWithFailedLookupLocations, R extends ResolutionWithResolvedFileName>(
             names: string[],
             containingFile: string,
+            redirectedReference: ResolvedProjectReference | undefined,
             cache: Map<Map<T>>,
-            perDirectoryCache: Map<Map<T>>,
-            loader: (name: string, containingFile: string, options: CompilerOptions, host: ModuleResolutionHost) => T,
+            perDirectoryCacheWithRedirects: CacheWithRedirects<Map<T>>,
+            loader: (name: string, containingFile: string, options: CompilerOptions, host: ModuleResolutionHost, redirectedReference?: ResolvedProjectReference) => T,
             getResolutionWithResolvedFileName: GetResolutionWithResolvedFileName<T, R>,
             reusedNames: string[] | undefined,
             logChanges: boolean): R[] {
@@ -252,6 +255,7 @@ namespace ts {
             const path = resolutionHost.toPath(containingFile);
             const resolutionsInFile = cache.get(path) || cache.set(path, createMap()).get(path)!;
             const dirPath = getDirectoryPath(path);
+            const perDirectoryCache = perDirectoryCacheWithRedirects.getOrCreateMapOfCacheRedirects(redirectedReference);
             let perDirectoryResolution = perDirectoryCache.get(dirPath);
             if (!perDirectoryResolution) {
                 perDirectoryResolution = createMap();
@@ -260,12 +264,20 @@ namespace ts {
             const resolvedModules: R[] = [];
             const compilerOptions = resolutionHost.getCompilationSettings();
             const hasInvalidatedNonRelativeUnresolvedImport = logChanges && isFileWithInvalidatedNonRelativeUnresolvedImports(path);
+
+            // All the resolutions in this file are invalidated if this file wasnt resolved using same redirect
+            const program = resolutionHost.getCurrentProgram();
+            const oldRedirect = program && program.getResolvedProjectReferenceToRedirect(containingFile);
+            const unmatchedRedirects = oldRedirect ?
+                !redirectedReference || redirectedReference.sourceFile.path !== oldRedirect.sourceFile.path :
+                !!redirectedReference;
+
             const seenNamesInFile = createMap<true>();
             for (const name of names) {
                 let resolution = resolutionsInFile.get(name);
                 // Resolution is valid if it is present and not invalidated
                 if (!seenNamesInFile.has(name) &&
-                    allFilesHaveInvalidatedResolution || !resolution || resolution.isInvalidated ||
+                    allFilesHaveInvalidatedResolution || unmatchedRedirects || !resolution || resolution.isInvalidated ||
                     // If the name is unresolved import that was invalidated, recalculate
                     (hasInvalidatedNonRelativeUnresolvedImport && !isExternalModuleNameRelative(name) && !getResolutionWithResolvedFileName(resolution))) {
                     const existingResolution = resolution;
@@ -274,7 +286,7 @@ namespace ts {
                         resolution = resolutionInDirectory;
                     }
                     else {
-                        resolution = loader(name, containingFile, compilerOptions, resolutionHost);
+                        resolution = loader(name, containingFile, compilerOptions, resolutionHost, redirectedReference);
                         perDirectoryResolution.set(name, resolution);
                     }
                     resolutionsInFile.set(name, resolution);
@@ -323,18 +335,18 @@ namespace ts {
             }
         }
 
-        function resolveTypeReferenceDirectives(typeDirectiveNames: string[], containingFile: string): ResolvedTypeReferenceDirective[] {
+        function resolveTypeReferenceDirectives(typeDirectiveNames: string[], containingFile: string, redirectedReference?: ResolvedProjectReference): ResolvedTypeReferenceDirective[] {
             return resolveNamesWithLocalCache<CachedResolvedTypeReferenceDirectiveWithFailedLookupLocations, ResolvedTypeReferenceDirective>(
-                typeDirectiveNames, containingFile,
+                typeDirectiveNames, containingFile, redirectedReference,
                 resolvedTypeReferenceDirectives, perDirectoryResolvedTypeReferenceDirectives,
                 resolveTypeReferenceDirective, getResolvedTypeReferenceDirective,
                 /*reusedNames*/ undefined, /*logChanges*/ false
             );
         }
 
-        function resolveModuleNames(moduleNames: string[], containingFile: string, reusedNames: string[] | undefined): ResolvedModuleFull[] {
+        function resolveModuleNames(moduleNames: string[], containingFile: string, reusedNames: string[] | undefined, redirectedReference?: ResolvedProjectReference): ResolvedModuleFull[] {
             return resolveNamesWithLocalCache<CachedResolvedModuleWithFailedLookupLocations, ResolvedModuleFull>(
-                moduleNames, containingFile,
+                moduleNames, containingFile, redirectedReference,
                 resolvedModuleNames, perDirectoryResolvedModuleNames,
                 resolveModuleName, getResolvedModule,
                 reusedNames, logChangesWhenResolvingModule
@@ -594,6 +606,20 @@ namespace ts {
             }
         }
 
+        function removeResolutionsFromProjectReferenceRedirects(filePath: Path) {
+            if (!fileExtensionIs(filePath, Extension.Json)) { return; }
+
+            const program = resolutionHost.getCurrentProgram();
+            if (!program) { return; }
+
+            // If this file is input file for the referenced project, get it
+            const resolvedProjectReference = program.getResolvedProjectReferenceByPath(filePath);
+            if (!resolvedProjectReference) { return; }
+
+            // filePath is for the projectReference and the containing file is from this project reference, invalidate the resolution
+            resolvedProjectReference.commandLine.fileNames.forEach(f => removeResolutionsOfFile(resolutionHost.toPath(f)));
+        }
+
         function removeResolutionsOfFile(filePath: Path) {
             removeResolutionsOfFileFromCache(resolvedModuleNames, filePath);
             removeResolutionsOfFileFromCache(resolvedTypeReferenceDirectives, filePath);
diff --git a/src/compiler/types.ts b/src/compiler/types.ts
index f2c9238aace..610cc4e61c7 100644
--- a/src/compiler/types.ts
+++ b/src/compiler/types.ts
@@ -2906,8 +2906,11 @@ namespace ts {
         /* @internal */ getResolvedModuleWithFailedLookupLocationsFromCache(moduleName: string, containingFile: string): ResolvedModuleWithFailedLookupLocations | undefined;
 
         getProjectReferences(): ReadonlyArray<ProjectReference> | undefined;
-        getResolvedProjectReferences(): (ResolvedProjectReference | undefined)[] | undefined;
+        getResolvedProjectReferences(): ReadonlyArray<ResolvedProjectReference | undefined> | undefined;
         /*@internal*/ getProjectReferenceRedirect(fileName: string): string | undefined;
+        /*@internal*/ getResolvedProjectReferenceToRedirect(fileName: string): ResolvedProjectReference | undefined;
+        /*@internal*/ forEachResolvedProjectReference<T>(cb: (resolvedProjectReference: ResolvedProjectReference | undefined, resolvedProjectReferencePath: Path) => T | undefined): T | undefined;
+        /*@internal*/ getResolvedProjectReferenceByPath(projectReferencePath: Path): ResolvedProjectReference | undefined;
     }
 
     /* @internal */
@@ -2916,6 +2919,7 @@ namespace ts {
     export interface ResolvedProjectReference {
         commandLine: ParsedCommandLine;
         sourceFile: SourceFile;
+        references?: ReadonlyArray<ResolvedProjectReference | undefined>;
     }
 
     /* @internal */
@@ -4957,13 +4961,13 @@ namespace ts {
          * If resolveModuleNames is implemented then implementation for members from ModuleResolutionHost can be just
          * 'throw new Error("NotImplemented")'
          */
-        resolveModuleNames?(moduleNames: string[], containingFile: string, reusedNames?: string[]): (ResolvedModule | undefined)[];
+        resolveModuleNames?(moduleNames: string[], containingFile: string, reusedNames?: string[], redirectedReference?: ResolvedProjectReference): (ResolvedModule | undefined)[];
         /**
          * This method is a companion for 'resolveModuleNames' and is used to resolve 'types' references to actual type declaration files
          */
-        resolveTypeReferenceDirectives?(typeReferenceDirectiveNames: string[], containingFile: string): ResolvedTypeReferenceDirective[];
+        resolveTypeReferenceDirectives?(typeReferenceDirectiveNames: string[], containingFile: string, redirectedReference?: ResolvedProjectReference): ResolvedTypeReferenceDirective[];
         getEnvironmentVariable?(name: string): string | undefined;
-        /* @internal */ onReleaseOldSourceFile?(oldSourceFile: SourceFile, oldOptions: CompilerOptions): void;
+        /* @internal */ onReleaseOldSourceFile?(oldSourceFile: SourceFile, oldOptions: CompilerOptions, hasSourceFileByPath: boolean): void;
         /* @internal */ hasInvalidatedResolution?: HasInvalidatedResolution;
         /* @internal */ hasChangedAutomaticTypeDirectiveNames?: boolean;
         createHash?(data: string): string;
diff --git a/src/compiler/watch.ts b/src/compiler/watch.ts
index 24ce39fdc4f..261013e29b3 100644
--- a/src/compiler/watch.ts
+++ b/src/compiler/watch.ts
@@ -338,9 +338,9 @@ namespace ts {
         getEnvironmentVariable?(name: string): string | undefined;
 
         /** If provided, used to resolve the module names, otherwise typescript's default module resolution */
-        resolveModuleNames?(moduleNames: string[], containingFile: string, reusedNames?: string[]): ResolvedModule[];
+        resolveModuleNames?(moduleNames: string[], containingFile: string, reusedNames?: string[], redirectedReference?: ResolvedProjectReference): ResolvedModule[];
         /** If provided, used to resolve type reference directives, otherwise typescript's default resolution */
-        resolveTypeReferenceDirectives?(typeReferenceDirectiveNames: string[], containingFile: string): ResolvedTypeReferenceDirective[];
+        resolveTypeReferenceDirectives?(typeReferenceDirectiveNames: string[], containingFile: string, redirectedReference?: ResolvedProjectReference): ResolvedTypeReferenceDirective[];
     }
 
     /** Internal interface used to wire emit through same host */
@@ -558,11 +558,11 @@ namespace ts {
         );
         // Resolve module using host module resolution strategy if provided otherwise use resolution cache to resolve module names
         compilerHost.resolveModuleNames = host.resolveModuleNames ?
-            ((moduleNames, containingFile, reusedNames) => host.resolveModuleNames!(moduleNames, containingFile, reusedNames)) :
-            ((moduleNames, containingFile, reusedNames) => resolutionCache.resolveModuleNames(moduleNames, containingFile, reusedNames));
+            ((moduleNames, containingFile, reusedNames, redirectedReference) => host.resolveModuleNames!(moduleNames, containingFile, reusedNames, redirectedReference)) :
+            ((moduleNames, containingFile, reusedNames, redirectedReference) => resolutionCache.resolveModuleNames(moduleNames, containingFile, reusedNames, redirectedReference));
         compilerHost.resolveTypeReferenceDirectives = host.resolveTypeReferenceDirectives ?
-            ((typeDirectiveNames, containingFile) => host.resolveTypeReferenceDirectives!(typeDirectiveNames, containingFile)) :
-            ((typeDirectiveNames, containingFile) => resolutionCache.resolveTypeReferenceDirectives(typeDirectiveNames, containingFile));
+            ((typeDirectiveNames, containingFile, redirectedReference) => host.resolveTypeReferenceDirectives!(typeDirectiveNames, containingFile, redirectedReference)) :
+            ((typeDirectiveNames, containingFile, redirectedReference) => resolutionCache.resolveTypeReferenceDirectives(typeDirectiveNames, containingFile, redirectedReference));
         const userProvidedResolution = !!host.resolveModuleNames || !!host.resolveTypeReferenceDirectives;
 
         synchronizeProgram();
@@ -764,8 +764,8 @@ namespace ts {
             return !hostSourceFile || isFileMissingOnHost(hostSourceFile) ? undefined : hostSourceFile.version.toString();
         }
 
-        function onReleaseOldSourceFile(oldSourceFile: SourceFile, _oldOptions: CompilerOptions) {
-            const hostSourceFileInfo = sourceFilesCache.get(oldSourceFile.path);
+        function onReleaseOldSourceFile(oldSourceFile: SourceFile, _oldOptions: CompilerOptions, hasSourceFileByPath: boolean) {
+            const hostSourceFileInfo = sourceFilesCache.get(oldSourceFile.resolvedPath);
             // If this is the source file thats in the cache and new program doesnt need it,
             // remove the cached entry.
             // Note we arent deleting entry if file became missing in new program or
@@ -779,8 +779,10 @@ namespace ts {
                     if ((hostSourceFileInfo as FilePresentOnHost).fileWatcher) {
                         (hostSourceFileInfo as FilePresentOnHost).fileWatcher.close();
                     }
-                    sourceFilesCache.delete(oldSourceFile.path);
-                    resolutionCache.removeResolutionsOfFile(oldSourceFile.path);
+                    sourceFilesCache.delete(oldSourceFile.resolvedPath);
+                    if (!hasSourceFileByPath) {
+                        resolutionCache.removeResolutionsOfFile(oldSourceFile.path);
+                    }
                 }
             }
         }
@@ -875,6 +877,7 @@ namespace ts {
             if (eventKind === FileWatcherEventKind.Deleted && sourceFilesCache.get(path)) {
                 resolutionCache.invalidateResolutionOfFile(path);
             }
+            resolutionCache.removeResolutionsFromProjectReferenceRedirects(path);
             nextSourceFileVersion(path);
 
             // Update the program
diff --git a/src/server/editorServices.ts b/src/server/editorServices.ts
index 30a9844eaf8..34d32eb2cc0 100644
--- a/src/server/editorServices.ts
+++ b/src/server/editorServices.ts
@@ -918,15 +918,20 @@ namespace ts.server {
             if (!info) {
                 this.logger.msg(`Error: got watch notification for unknown file: ${fileName}`);
             }
-            else if (eventKind === FileWatcherEventKind.Deleted) {
-                // File was deleted
-                this.handleDeletedFile(info);
-            }
-            else if (!info.isScriptOpen()) {
-                // file has been changed which might affect the set of referenced files in projects that include
-                // this file and set of inferred projects
-                info.delayReloadNonMixedContentFile();
-                this.delayUpdateProjectGraphs(info.containingProjects);
+            else {
+                if (info.containingProjects) {
+                    info.containingProjects.forEach(project => project.resolutionCache.removeResolutionsFromProjectReferenceRedirects(info.path));
+                }
+                if (eventKind === FileWatcherEventKind.Deleted) {
+                    // File was deleted
+                    this.handleDeletedFile(info);
+                }
+                else if (!info.isScriptOpen()) {
+                    // file has been changed which might affect the set of referenced files in projects that include
+                    // this file and set of inferred projects
+                    info.delayReloadNonMixedContentFile();
+                    this.delayUpdateProjectGraphs(info.containingProjects);
+                }
             }
         }
 
@@ -2487,17 +2492,14 @@ namespace ts.server {
                 }
                 else {
                     // If the configured project for project reference has more than zero references, keep it alive
-                    const resolvedProjectReferences = project.getResolvedProjectReferences();
-                    if (resolvedProjectReferences) {
-                        for (const ref of resolvedProjectReferences) {
-                            if (ref) {
-                                const refProject = this.configuredProjects.get(ref.sourceFile.path);
-                                if (refProject && refProject.hasOpenRef()) {
-                                    toRemoveConfiguredProjects.delete(project.canonicalConfigFilePath);
-                                }
+                    project.forEachResolvedProjectReference(ref => {
+                        if (ref) {
+                            const refProject = this.configuredProjects.get(ref.sourceFile.path);
+                            if (refProject && refProject.hasOpenRef()) {
+                                toRemoveConfiguredProjects.delete(project.canonicalConfigFilePath);
                             }
                         }
-                    }
+                    });
                 }
             });
 
diff --git a/src/server/project.ts b/src/server/project.ts
index 29aafccccbb..fe977124e9b 100644
--- a/src/server/project.ts
+++ b/src/server/project.ts
@@ -281,8 +281,8 @@ namespace ts.server {
             return this.projectStateVersion.toString();
         }
 
-        getProjectReferences(): ReadonlyArray<ProjectReference> {
-            return emptyArray;
+        getProjectReferences(): ReadonlyArray<ProjectReference> | undefined {
+            return undefined;
         }
 
         getScriptFileNames() {
@@ -368,16 +368,16 @@ namespace ts.server {
             return !this.isWatchedMissingFile(path) && this.directoryStructureHost.fileExists(file);
         }
 
-        resolveModuleNames(moduleNames: string[], containingFile: string, reusedNames?: string[]): ResolvedModuleFull[] {
-            return this.resolutionCache.resolveModuleNames(moduleNames, containingFile, reusedNames);
+        resolveModuleNames(moduleNames: string[], containingFile: string, reusedNames?: string[], redirectedReference?: ResolvedProjectReference): ResolvedModuleFull[] {
+            return this.resolutionCache.resolveModuleNames(moduleNames, containingFile, reusedNames, redirectedReference);
         }
 
         getResolvedModuleWithFailedLookupLocationsFromCache(moduleName: string, containingFile: string): ResolvedModuleWithFailedLookupLocations | undefined {
             return this.resolutionCache.getResolvedModuleWithFailedLookupLocationsFromCache(moduleName, containingFile);
         }
 
-        resolveTypeReferenceDirectives(typeDirectiveNames: string[], containingFile: string): ResolvedTypeReferenceDirective[] {
-            return this.resolutionCache.resolveTypeReferenceDirectives(typeDirectiveNames, containingFile);
+        resolveTypeReferenceDirectives(typeDirectiveNames: string[], containingFile: string, redirectedReference?: ResolvedProjectReference): ResolvedTypeReferenceDirective[] {
+            return this.resolutionCache.resolveTypeReferenceDirectives(typeDirectiveNames, containingFile, redirectedReference);
         }
 
         directoryExists(path: string): boolean {
@@ -583,14 +583,11 @@ namespace ts.server {
                 for (const f of this.program.getSourceFiles()) {
                     this.detachScriptInfoIfNotRoot(f.fileName);
                 }
-                const projectReferences = this.program.getResolvedProjectReferences();
-                if (projectReferences) {
-                    for (const ref of projectReferences) {
-                        if (ref) {
-                            this.detachScriptInfoFromProject(ref.sourceFile.fileName);
-                        }
+                this.program.forEachResolvedProjectReference(ref => {
+                    if (ref) {
+                        this.detachScriptInfoFromProject(ref.sourceFile.fileName);
                     }
-                }
+                });
             }
             // Release external files
             forEach(this.externalFiles, externalFile => this.detachScriptInfoIfNotRoot(externalFile));
@@ -925,12 +922,19 @@ namespace ts.server {
             if (hasNewProgram) {
                 if (oldProgram) {
                     for (const f of oldProgram.getSourceFiles()) {
-                        if (this.program.getSourceFileByPath(f.path)) {
-                            continue;
+                        const newFile = this.program.getSourceFileByPath(f.resolvedPath);
+                        if (!newFile || (f.resolvedPath === f.path && newFile.resolvedPath !== f.path)) {
+                            // new program does not contain this file - detach it from the project
+                            // - remove resolutions only if the new program doesnt contain source file by the path (not resolvedPath since path is used for resolution)
+                            this.detachScriptInfoFromProject(f.fileName, !!this.program.getSourceFileByPath(f.path));
                         }
-                        // new program does not contain this file - detach it from the project
-                        this.detachScriptInfoFromProject(f.fileName);
                     }
+
+                    oldProgram.forEachResolvedProjectReference((resolvedProjectReference, resolvedProjectReferencePath) => {
+                        if (resolvedProjectReference && !this.program.getResolvedProjectReferenceByPath(resolvedProjectReferencePath)) {
+                            this.detachScriptInfoFromProject(resolvedProjectReference.sourceFile.fileName);
+                        }
+                    });
                 }
 
                 // Update the missing file paths watcher
@@ -964,11 +968,13 @@ namespace ts.server {
             return hasNewProgram;
         }
 
-        private detachScriptInfoFromProject(uncheckedFileName: string) {
+        private detachScriptInfoFromProject(uncheckedFileName: string, noRemoveResolution?: boolean) {
             const scriptInfoToDetach = this.projectService.getScriptInfo(uncheckedFileName);
             if (scriptInfoToDetach) {
                 scriptInfoToDetach.detachFromProject(this);
-                this.resolutionCache.removeResolutionsOfFile(scriptInfoToDetach.path);
+                if (!noRemoveResolution) {
+                    this.resolutionCache.removeResolutionsOfFile(scriptInfoToDetach.path);
+                }
             }
         }
 
@@ -1399,8 +1405,8 @@ namespace ts.server {
             return asNormalizedPath(this.getProjectName());
         }
 
-        getProjectReferences(): ReadonlyArray<ProjectReference> {
-            return this.projectReferences || emptyArray;
+        getProjectReferences(): ReadonlyArray<ProjectReference> | undefined {
+            return this.projectReferences;
         }
 
         updateReferences(refs: ReadonlyArray<ProjectReference> | undefined) {
@@ -1408,9 +1414,9 @@ namespace ts.server {
         }
 
         /*@internal*/
-        getResolvedProjectReferences() {
+        forEachResolvedProjectReference<T>(cb: (resolvedProjectReference: ResolvedProjectReference | undefined, resolvedProjectReferencePath: Path) => T | undefined): T | undefined {
             const program = this.getCurrentProgram();
-            return program && program.getResolvedProjectReferences();
+            return program && program.forEachResolvedProjectReference(cb);
         }
 
         enablePlugins() {
diff --git a/src/services/services.ts b/src/services/services.ts
index 9e08f1b14a6..27a458bf1ef 100644
--- a/src/services/services.ts
+++ b/src/services/services.ts
@@ -1232,11 +1232,11 @@ namespace ts {
             }
 
             if (host.resolveModuleNames) {
-                compilerHost.resolveModuleNames = (moduleNames, containingFile, reusedNames) => host.resolveModuleNames!(moduleNames, containingFile, reusedNames);
+                compilerHost.resolveModuleNames = (moduleNames, containingFile, reusedNames, redirectedReference) => host.resolveModuleNames!(moduleNames, containingFile, reusedNames, redirectedReference);
             }
             if (host.resolveTypeReferenceDirectives) {
-                compilerHost.resolveTypeReferenceDirectives = (typeReferenceDirectiveNames, containingFile) => {
-                    return host.resolveTypeReferenceDirectives!(typeReferenceDirectiveNames, containingFile);
+                compilerHost.resolveTypeReferenceDirectives = (typeReferenceDirectiveNames, containingFile, redirectedReference) => {
+                    return host.resolveTypeReferenceDirectives!(typeReferenceDirectiveNames, containingFile, redirectedReference);
                 };
             }
 
@@ -1276,7 +1276,7 @@ namespace ts {
             // not part of the new program.
             function onReleaseOldSourceFile(oldSourceFile: SourceFile, oldOptions: CompilerOptions) {
                 const oldSettingsKey = documentRegistry.getKeyForCompilationSettings(oldOptions);
-                documentRegistry.releaseDocumentWithKey(oldSourceFile.path, oldSettingsKey);
+                documentRegistry.releaseDocumentWithKey(oldSourceFile.resolvedPath, oldSettingsKey);
             }
 
             function getOrCreateSourceFile(fileName: string, languageVersion: ScriptTarget, onError?: (message: string) => void, shouldCreateNewSourceFile?: boolean): SourceFile | undefined {
diff --git a/src/services/types.ts b/src/services/types.ts
index 011c98f9da6..80dac58095c 100644
--- a/src/services/types.ts
+++ b/src/services/types.ts
@@ -212,9 +212,9 @@ namespace ts {
          *
          * If this is implemented, `getResolvedModuleWithFailedLookupLocationsFromCache` should be too.
          */
-        resolveModuleNames?(moduleNames: string[], containingFile: string, reusedNames?: string[]): ResolvedModule[];
+        resolveModuleNames?(moduleNames: string[], containingFile: string, reusedNames?: string[], redirectedReference?: ResolvedProjectReference): ResolvedModule[];
         getResolvedModuleWithFailedLookupLocationsFromCache?(modulename: string, containingFile: string): ResolvedModuleWithFailedLookupLocations | undefined;
-        resolveTypeReferenceDirectives?(typeDirectiveNames: string[], containingFile: string): ResolvedTypeReferenceDirective[];
+        resolveTypeReferenceDirectives?(typeDirectiveNames: string[], containingFile: string, redirectedReference?: ResolvedProjectReference): ResolvedTypeReferenceDirective[];
         /* @internal */ hasInvalidatedResolution?: HasInvalidatedResolution;
         /* @internal */ hasChangedAutomaticTypeDirectiveNames?: boolean;
 
diff --git a/src/testRunner/unittests/projectReferences.ts b/src/testRunner/unittests/projectReferences.ts
index 4702c0c26ce..53fcd4a9dd0 100644
--- a/src/testRunner/unittests/projectReferences.ts
+++ b/src/testRunner/unittests/projectReferences.ts
@@ -184,7 +184,7 @@ namespace ts {
             };
             testProjectReferences(spec, "/primary/tsconfig.json", program => {
                 const errs = program.getOptionsDiagnostics();
-                assertHasError("Reports an error about a missing file", errs, Diagnostics.File_0_does_not_exist);
+                assertHasError("Reports an error about a missing file", errs, Diagnostics.File_0_not_found);
             });
         });
 
diff --git a/src/testRunner/unittests/tsbuild.ts b/src/testRunner/unittests/tsbuild.ts
index dca77505b80..72b1121e861 100644
--- a/src/testRunner/unittests/tsbuild.ts
+++ b/src/testRunner/unittests/tsbuild.ts
@@ -340,16 +340,6 @@ export default hello.hello`);
                     "/src/tests/index.ts"
                 ]);
 
-                function getLibs() {
-                    return [
-                        "/lib/lib.d.ts",
-                        "/lib/lib.es5.d.ts",
-                        "/lib/lib.dom.d.ts",
-                        "/lib/lib.webworker.importscripts.d.ts",
-                        "/lib/lib.scripthost.d.ts"
-                    ];
-                }
-
                 function getCoreOutputs() {
                     return [
                         "/src/core/index.d.ts",
@@ -397,6 +387,74 @@ export default hello.hello`);
                 }
             });
         });
+
+        describe("tsbuild - when project reference is referenced transitively", () => {
+            const projFs = loadProjectFromDisk("tests/projects/transitiveReferences");
+            const allExpectedOutputs = [
+                "/src/a.js", "/src/a.d.ts",
+                "/src/b.js", "/src/b.d.ts",
+                "/src/c.js"
+            ];
+            const expectedFileTraces = [
+                ...getLibs(),
+                "/src/a.ts",
+                ...getLibs(),
+                "/src/a.d.ts",
+                "/src/b.ts",
+                ...getLibs(),
+                "/src/a.d.ts",
+                "/src/b.d.ts",
+                "/src/refs/a.d.ts",
+                "/src/c.ts"
+            ];
+
+            function verifyBuild(modifyDiskLayout: (fs: vfs.FileSystem) => void, allExpectedOutputs: ReadonlyArray<string>, expectedDiagnostics: DiagnosticMessage[], expectedFileTraces: ReadonlyArray<string>) {
+                const fs = projFs.shadow();
+                const host = new fakes.SolutionBuilderHost(fs);
+                modifyDiskLayout(fs);
+                const builder = createSolutionBuilder(host, ["/src/tsconfig.c.json"], { listFiles: true });
+                builder.buildAllProjects();
+                host.assertDiagnosticMessages(...expectedDiagnostics);
+                for (const output of allExpectedOutputs) {
+                    assert(fs.existsSync(output), `Expect file ${output} to exist`);
+                }
+                assert.deepEqual(host.traces, expectedFileTraces);
+            }
+
+            function modifyFsBTsToNonRelativeImport(fs: vfs.FileSystem, moduleResolution: "node" | "classic") {
+                fs.writeFileSync("/src/b.ts", `import {A} from 'a';
+export const b = new A();`);
+                fs.writeFileSync("/src/tsconfig.b.json", JSON.stringify({
+                    compilerOptions: {
+                        composite: true,
+                        moduleResolution
+                    },
+                    files: ["b.ts"],
+                    references: [{ path: "tsconfig.a.json" }]
+                }));
+            }
+
+            it("verify that it builds correctly", () => {
+                verifyBuild(noop, allExpectedOutputs, emptyArray, expectedFileTraces);
+            });
+
+            it("verify that it builds correctly when the referenced project uses different module resolution", () => {
+                verifyBuild(fs => modifyFsBTsToNonRelativeImport(fs, "classic"), allExpectedOutputs, emptyArray, expectedFileTraces);
+            });
+
+            it("verify that it build reports error about module not found with node resolution with external module name", () => {
+                // Error in b build only a
+                const allExpectedOutputs = ["/src/a.js", "/src/a.d.ts"];
+                const expectedFileTraces = [
+                    ...getLibs(),
+                    "/src/a.ts",
+                ];
+                verifyBuild(fs => modifyFsBTsToNonRelativeImport(fs, "node"),
+                    allExpectedOutputs,
+                    [Diagnostics.Cannot_find_module_0],
+                    expectedFileTraces);
+            });
+        });
     }
 
     export namespace OutFile {
@@ -605,4 +663,14 @@ export default hello.hello`);
         fs.makeReadonly();
         return fs;
     }
+
+    function getLibs() {
+        return [
+            "/lib/lib.d.ts",
+            "/lib/lib.es5.d.ts",
+            "/lib/lib.dom.d.ts",
+            "/lib/lib.webworker.importscripts.d.ts",
+            "/lib/lib.scripthost.d.ts"
+        ];
+    }
 }
diff --git a/src/testRunner/unittests/tsbuildWatchMode.ts b/src/testRunner/unittests/tsbuildWatchMode.ts
index 439cff15c63..3461cfdb785 100644
--- a/src/testRunner/unittests/tsbuildWatchMode.ts
+++ b/src/testRunner/unittests/tsbuildWatchMode.ts
@@ -26,8 +26,23 @@ namespace ts.tscWatch {
         type SubProjectFiles = [ReadonlyFile, ReadonlyFile] | [ReadonlyFile, ReadonlyFile, ReadonlyFile, ReadonlyFile];
         const root = Harness.IO.getWorkspaceRoot();
 
+        function getProjectPath(project: string) {
+            return `${projectsLocation}/${project}`;
+        }
+
+        function getFilePathInProject(project: string, file: string) {
+            return `${projectsLocation}/${project}/${file}`;
+        }
+
+        function getFileFromProject(project: string, file: string): File {
+            return {
+                path: getFilePathInProject(project, file),
+                content: Harness.IO.readFile(`${root}/tests/projects/${project}/${file}`)!
+            };
+        }
+
         function projectPath(subProject: SubProject) {
-            return `${projectsLocation}/${project}/${subProject}`;
+            return getFilePathInProject(project, subProject);
         }
 
         function projectFilePath(subProject: SubProject, baseFileName: string) {
@@ -39,10 +54,7 @@ namespace ts.tscWatch {
         }
 
         function projectFile(subProject: SubProject, baseFileName: string): File {
-            return {
-                path: projectFilePath(subProject, baseFileName),
-                content: Harness.IO.readFile(`${root}/tests/projects/${project}/${subProject}/${baseFileName}`)!
-            };
+            return getFileFromProject(project, `${subProject}/${baseFileName}`);
         }
 
         function subProjectFiles(subProject: SubProject, anotherModuleAndSomeDecl?: true): SubProjectFiles {
@@ -97,7 +109,7 @@ namespace ts.tscWatch {
         const tests = subProjectFiles(SubProject.tests);
         const ui = subProjectFiles(SubProject.ui);
         const allFiles: ReadonlyArray<File> = [libFile, ...core, ...logic, ...tests, ...ui];
-        const testProjectExpectedWatchedFiles = [core[0], core[1], core[2]!, ...logic, ...tests].map(f => f.path); // tslint:disable-line no-unnecessary-type-assertion (TODO: type assertion should be necessary)
+        const testProjectExpectedWatchedFiles = [core[0], core[1], core[2]!, ...logic, ...tests].map(f => f.path.toLowerCase()); // tslint:disable-line no-unnecessary-type-assertion (TODO: type assertion should be necessary)
         const testProjectExpectedWatchedDirectoriesRecursive = [projectPath(SubProject.core), projectPath(SubProject.logic)];
 
         function createSolutionInWatchMode(allFiles: ReadonlyArray<File>, defaultOptions?: BuildOptions, disableConsoleClears?: boolean) {
@@ -244,7 +256,7 @@ export class someClass2 { }`);
             const allFiles = [libFile, ...core, logic[1], ...tests];
             const host = createWatchedSystem(allFiles, { currentDirectory: projectsLocation });
             createSolutionBuilderWithWatch(host, [`${project}/${SubProject.tests}`]);
-            checkWatchedFiles(host, [core[0], core[1], core[2]!, logic[0], ...tests].map(f => f.path)); // tslint:disable-line no-unnecessary-type-assertion (TODO: type assertion should be necessary)
+            checkWatchedFiles(host, [core[0], core[1], core[2]!, logic[0], ...tests].map(f => f.path.toLowerCase())); // tslint:disable-line no-unnecessary-type-assertion (TODO: type assertion should be necessary)
             checkWatchedDirectories(host, emptyArray, /*recursive*/ false);
             checkWatchedDirectories(host, [projectPath(SubProject.core)], /*recursive*/ true);
             checkOutputErrorsInitial(host, [
@@ -446,100 +458,550 @@ let x: string = 10;`);
             });
         });
 
-        describe("tsc-watch works with project references", () => {
-            const coreIndexDts = projectFileName(SubProject.core, "index.d.ts");
-            const coreAnotherModuleDts = projectFileName(SubProject.core, "anotherModule.d.ts");
-            const logicIndexDts = projectFileName(SubProject.logic, "index.d.ts");
-            const expectedWatchedFiles = [core[0], logic[0], ...tests, libFile].map(f => f.path).concat([coreIndexDts, coreAnotherModuleDts, logicIndexDts].map(f => f.toLowerCase()));
-            const expectedWatchedDirectoriesRecursive = projectSystem.getTypeRootsFromLocation(projectPath(SubProject.tests));
-
-            function createSolution() {
-                const host = createWatchedSystem(allFiles, { currentDirectory: projectsLocation });
-                const solutionBuilder = createSolutionBuilder(host, [`${project}/${SubProject.tests}`], {});
-                return { host, solutionBuilder };
-            }
-
-            function createBuiltSolution() {
-                const result = createSolution();
-                const { host, solutionBuilder } = result;
-                solutionBuilder.buildAllProjects();
-                const outputFileStamps = getOutputFileStamps(host);
-                for (const stamp of outputFileStamps) {
-                    assert.isDefined(stamp[1], `${stamp[0]} expected to be present`);
-                }
-                return result;
-            }
-
-            function verifyWatches(host: WatchedSystem) {
-                checkWatchedFilesDetailed(host, expectedWatchedFiles, 1);
-                checkWatchedDirectories(host, emptyArray, /*recursive*/ false);
-                checkWatchedDirectoriesDetailed(host, expectedWatchedDirectoriesRecursive, 1, /*recursive*/ true);
-            }
-
-            function createSolutionAndWatchMode() {
-                // Build the composite project
-                const { host, solutionBuilder } = createBuiltSolution();
-
-                // Build in watch mode
-                const watch = createWatchOfConfigFileReturningBuilder(tests[0].path, host);
-                checkOutputErrorsInitial(host, emptyArray);
-
-                return { host, solutionBuilder, watch };
-            }
-
-            function verifyDependencies(watch: () => BuilderProgram, filePath: string, expected: ReadonlyArray<string>) {
-                checkArray(`${filePath} dependencies`, watch().getAllDependencies(watch().getSourceFile(filePath)!), expected);
-            }
-
+        describe("tsc-watch and tsserver works with project references", () => {
             describe("invoking when references are already built", () => {
-                it("verifies dependencies and watches", () => {
-                    const { host, watch } = createSolutionAndWatchMode();
+                function verifyWatchesOfProject(host: WatchedSystem, expectedWatchedFiles: ReadonlyArray<string>, expectedWatchedDirectoriesRecursive: ReadonlyArray<string>, expectedWatchedDirectories?: ReadonlyArray<string>) {
+                    checkWatchedFilesDetailed(host, expectedWatchedFiles, 1);
+                    checkWatchedDirectoriesDetailed(host, expectedWatchedDirectories || emptyArray, 1, /*recursive*/ false);
+                    checkWatchedDirectoriesDetailed(host, expectedWatchedDirectoriesRecursive, 1, /*recursive*/ true);
+                }
 
-                    verifyWatches(host);
-                    verifyDependencies(watch, coreIndexDts, [coreIndexDts]);
-                    verifyDependencies(watch, coreAnotherModuleDts, [coreAnotherModuleDts]);
-                    verifyDependencies(watch, logicIndexDts, [logicIndexDts, coreAnotherModuleDts]);
-                    verifyDependencies(watch, tests[1].path, [tests[1].path, coreAnotherModuleDts, logicIndexDts, coreAnotherModuleDts]);
-                });
+                function createSolutionOfProject(allFiles: ReadonlyArray<File>,
+                    currentDirectory: string,
+                    solutionBuilderconfig: string,
+                    getOutputFileStamps: (host: WatchedSystem) => ReadonlyArray<OutputFileStamp>) {
+                    // Build the composite project
+                    const host = createWatchedSystem(allFiles, { currentDirectory });
+                    const solutionBuilder = createSolutionBuilder(host, [solutionBuilderconfig], {});
+                    solutionBuilder.buildAllProjects();
+                    const outputFileStamps = getOutputFileStamps(host);
+                    for (const stamp of outputFileStamps) {
+                        assert.isDefined(stamp[1], `${stamp[0]} expected to be present`);
+                    }
+                    return { host, solutionBuilder };
+                }
 
-                it("local edit in ts file, result in watch compilation because logic.d.ts is written", () => {
-                    const { host, solutionBuilder, watch } = createSolutionAndWatchMode();
-                    host.writeFile(logic[1].path, `${logic[1].content}
+                function createSolutionAndWatchModeOfProject(
+                    allFiles: ReadonlyArray<File>,
+                    currentDirectory: string,
+                    solutionBuilderconfig: string,
+                    watchConfig: string,
+                    getOutputFileStamps: (host: WatchedSystem) => ReadonlyArray<OutputFileStamp>) {
+                    // Build the composite project
+                    const { host, solutionBuilder } = createSolutionOfProject(allFiles, currentDirectory, solutionBuilderconfig, getOutputFileStamps);
+
+                    // Build in watch mode
+                    const watch = createWatchOfConfigFileReturningBuilder(watchConfig, host);
+                    checkOutputErrorsInitial(host, emptyArray);
+
+                    return { host, solutionBuilder, watch };
+                }
+
+                function createSolutionAndServiceOfProject(allFiles: ReadonlyArray<File>,
+                    currentDirectory: string,
+                    solutionBuilderconfig: string,
+                    openFileName: string,
+                    getOutputFileStamps: (host: WatchedSystem) => ReadonlyArray<OutputFileStamp>) {
+                    // Build the composite project
+                    const { host, solutionBuilder } = createSolutionOfProject(allFiles, currentDirectory, solutionBuilderconfig, getOutputFileStamps);
+
+                    // service
+                    const service = projectSystem.createProjectService(host);
+                    service.openClientFile(openFileName);
+
+                    return { host, solutionBuilder, service };
+                }
+
+                function checkProjectActualFiles(service: projectSystem.TestProjectService, configFile: string, expectedFiles: ReadonlyArray<string>) {
+                    projectSystem.checkNumberOfProjects(service, { configuredProjects: 1 });
+                    projectSystem.checkProjectActualFiles(service.configuredProjects.get(configFile.toLowerCase())!, expectedFiles);
+                }
+
+                type Watch = () => BuilderProgram;
+
+                function verifyDependencies(watch: Watch, filePath: string, expected: ReadonlyArray<string>) {
+                    checkArray(`${filePath} dependencies`, watch().getAllDependencies(watch().getSourceFile(filePath)!), expected);
+                }
+
+                describe("on sample project", () => {
+                    const coreIndexDts = projectFileName(SubProject.core, "index.d.ts");
+                    const coreAnotherModuleDts = projectFileName(SubProject.core, "anotherModule.d.ts");
+                    const logicIndexDts = projectFileName(SubProject.logic, "index.d.ts");
+                    const expectedWatchedFiles = [core[0], logic[0], ...tests, libFile].map(f => f.path).concat([coreIndexDts, coreAnotherModuleDts, logicIndexDts].map(f => f.toLowerCase()));
+                    const expectedWatchedDirectoriesRecursive = projectSystem.getTypeRootsFromLocation(projectPath(SubProject.tests));
+                    const expectedProgramFiles = [tests[1].path, libFile.path, coreIndexDts, coreAnotherModuleDts, logicIndexDts];
+
+                    function createSolutionAndWatchMode() {
+                        return createSolutionAndWatchModeOfProject(allFiles, projectsLocation, `${project}/${SubProject.tests}`, tests[0].path, getOutputFileStamps);
+                    }
+
+                    function createSolutionAndService() {
+                        return createSolutionAndServiceOfProject(allFiles, projectsLocation, `${project}/${SubProject.tests}`, tests[1].path, getOutputFileStamps);
+                    }
+
+                    function verifyWatches(host: WatchedSystem, withTsserver?: boolean) {
+                        verifyWatchesOfProject(host, withTsserver ? expectedWatchedFiles.filter(f => f !== tests[1].path.toLowerCase()) : expectedWatchedFiles, expectedWatchedDirectoriesRecursive);
+                    }
+
+                    function verifyScenario(
+                        edit: (host: WatchedSystem, solutionBuilder: SolutionBuilder) => void,
+                        expectedFilesAfterEdit: ReadonlyArray<string>
+                    ) {
+                        it("with tsc-watch", () => {
+                            const { host, solutionBuilder, watch } = createSolutionAndWatchMode();
+
+                            edit(host, solutionBuilder);
+
+                            host.checkTimeoutQueueLengthAndRun(1);
+                            checkOutputErrorsIncremental(host, emptyArray);
+                            checkProgramActualFiles(watch().getProgram(), expectedFilesAfterEdit);
+
+                        });
+
+                        it("with tsserver", () => {
+                            const { host, solutionBuilder, service } = createSolutionAndService();
+
+                            edit(host, solutionBuilder);
+
+                            host.checkTimeoutQueueLengthAndRun(2);
+                            checkProjectActualFiles(service, tests[0].path, [tests[0].path, ...expectedFilesAfterEdit]);
+                        });
+                    }
+
+                    describe("verifies dependencies and watches", () => {
+                        it("with tsc-watch", () => {
+                            const { host, watch } = createSolutionAndWatchMode();
+                            verifyWatches(host);
+                            verifyDependencies(watch, coreIndexDts, [coreIndexDts]);
+                            verifyDependencies(watch, coreAnotherModuleDts, [coreAnotherModuleDts]);
+                            verifyDependencies(watch, logicIndexDts, [logicIndexDts, coreAnotherModuleDts]);
+                            verifyDependencies(watch, tests[1].path, expectedProgramFiles.filter(f => f !== libFile.path));
+                        });
+
+                        it("with tsserver", () => {
+                            const { host } = createSolutionAndService();
+                            verifyWatches(host, /*withTsserver*/ true);
+                        });
+                    });
+
+                    describe("local edit in ts file, result in watch compilation because logic.d.ts is written", () => {
+                        verifyScenario((host, solutionBuilder) => {
+                            host.writeFile(logic[1].path, `${logic[1].content}
 function foo() {
 }`);
-                    solutionBuilder.invalidateProject(`${project}/${SubProject.logic}`);
-                    solutionBuilder.buildInvalidatedProject();
+                            solutionBuilder.invalidateProject(`${project}/${SubProject.logic}`);
+                            solutionBuilder.buildInvalidatedProject();
 
-                    host.checkTimeoutQueueLengthAndRun(1); // not ideal, but currently because of d.ts but no new file is written
-                    checkOutputErrorsIncremental(host, emptyArray);
-                    checkProgramActualFiles(watch().getProgram(), [tests[1].path, libFile.path, coreIndexDts, coreAnotherModuleDts, logicIndexDts]);
-                });
+                            // not ideal, but currently because of d.ts but no new file is written
+                            // There will be timeout queued even though file contents are same
+                        }, expectedProgramFiles);
+                    });
 
-                it("non local edit in ts file, rebuilds in watch compilation", () => {
-                    const { host, solutionBuilder, watch } = createSolutionAndWatchMode();
-                    host.writeFile(logic[1].path, `${logic[1].content}
+                    describe("non local edit in ts file, rebuilds in watch compilation", () => {
+                        verifyScenario((host, solutionBuilder) => {
+                            host.writeFile(logic[1].path, `${logic[1].content}
 export function gfoo() {
 }`);
-                    solutionBuilder.invalidateProject(logic[0].path);
-                    solutionBuilder.buildInvalidatedProject();
+                            solutionBuilder.invalidateProject(logic[0].path);
+                            solutionBuilder.buildInvalidatedProject();
+                        }, expectedProgramFiles);
+                    });
 
-                    host.checkTimeoutQueueLengthAndRun(1);
-                    checkOutputErrorsIncremental(host, emptyArray);
-                    checkProgramActualFiles(watch().getProgram(), [tests[1].path, libFile.path, coreIndexDts, coreAnotherModuleDts, logicIndexDts]);
+                    describe("change in project reference config file builds correctly", () => {
+                        verifyScenario((host, solutionBuilder) => {
+                            host.writeFile(logic[0].path, JSON.stringify({
+                                compilerOptions: { composite: true, declaration: true, declarationDir: "decls" },
+                                references: [{ path: "../core" }]
+                            }));
+                            solutionBuilder.invalidateProject(logic[0].path, ConfigFileProgramReloadLevel.Full);
+                            solutionBuilder.buildInvalidatedProject();
+                        }, [tests[1].path, libFile.path, coreIndexDts, coreAnotherModuleDts, projectFilePath(SubProject.logic, "decls/index.d.ts")]);
+                    });
                 });
 
-                it("change in project reference config file builds correctly", () => {
-                    const { host, solutionBuilder, watch } = createSolutionAndWatchMode();
-                    host.writeFile(logic[0].path, JSON.stringify({
-                        compilerOptions: { composite: true, declaration: true, declarationDir: "decls" },
-                        references: [{ path: "../core" }]
-                    }));
-                    solutionBuilder.invalidateProject(logic[0].path, ConfigFileProgramReloadLevel.Full);
-                    solutionBuilder.buildInvalidatedProject();
+                describe("on transitive references", () => {
+                    const project = "transitiveReferences";
+                    const aTsFile = getFileFromProject(project, "a.ts");
+                    const bTsFile = getFileFromProject(project, "b.ts");
+                    const cTsFile = getFileFromProject(project, "c.ts");
+                    const aTsconfigFile = getFileFromProject(project, "tsconfig.a.json");
+                    const bTsconfigFile = getFileFromProject(project, "tsconfig.b.json");
+                    const cTsconfigFile = getFileFromProject(project, "tsconfig.c.json");
+                    const refs = getFileFromProject(project, "refs/a.d.ts");
 
-                    host.checkTimeoutQueueLengthAndRun(1);
-                    checkOutputErrorsIncremental(host, emptyArray);
-                    checkProgramActualFiles(watch().getProgram(), [tests[1].path, libFile.path, coreIndexDts, coreAnotherModuleDts, projectFilePath(SubProject.logic, "decls/index.d.ts")]);
+                    function getRootFile(multiFolder: boolean, fileFromDisk: File, multiFolderPath: string): File {
+                        return multiFolder ? {
+                            path: getFilePathInProject(project, multiFolderPath),
+                            content: fileFromDisk.content
+                                // Replace the relative imports
+                                .replace("./", "../")
+                        } : fileFromDisk;
+                    }
+
+                    function dtsFile(extensionLessFile: string) {
+                        return getFilePathInProject(project, `${extensionLessFile}.d.ts`);
+                    }
+
+                    function jsFile(extensionLessFile: string) {
+                        return getFilePathInProject(project, `${extensionLessFile}.js`);
+                    }
+
+                    function verifyWatchState(
+                        host: WatchedSystem,
+                        watch: Watch,
+                        expectedProgramFiles: ReadonlyArray<string>,
+                        expectedWatchedFiles: ReadonlyArray<string>,
+                        expectedWatchedDirectoriesRecursive: ReadonlyArray<string>,
+                        dependencies: ReadonlyArray<[string, ReadonlyArray<string>]>,
+                        expectedWatchedDirectories?: ReadonlyArray<string>) {
+                        checkProgramActualFiles(watch().getProgram(), expectedProgramFiles);
+                        verifyWatchesOfProject(host, expectedWatchedFiles, expectedWatchedDirectoriesRecursive, expectedWatchedDirectories);
+                        for (const [file, deps] of dependencies) {
+                            verifyDependencies(watch, file, deps);
+                        }
+                    }
+
+                    function getTsConfigFile(multiFolder: boolean, fileFromDisk: File, folder: string): File {
+                        if (!multiFolder) return fileFromDisk;
+
+                        return {
+                            path: getFilePathInProject(project, `${folder}/tsconfig.json`),
+                            content: fileFromDisk.content
+                                // Replace files array
+                                .replace(`${folder}.ts`, "index.ts")
+                                // Replace path mappings
+                                .replace("./*", "../*")
+                                .replace("./refs", "../refs")
+                                // Replace references
+                                .replace("tsconfig.a.json", "../a")
+                                .replace("tsconfig.b.json", "../b")
+                        };
+                    }
+
+                    // function writeFile(file: File) {
+                    //     Harness.IO.writeFile(file.path.replace(projectsLocation, "c:/temp"), file.content);
+                    // }
+
+                    function verifyTransitiveReferences(multiFolder: boolean) {
+                        const aTs = getRootFile(multiFolder, aTsFile, "a/index.ts");
+                        const bTs = getRootFile(multiFolder, bTsFile, "b/index.ts");
+                        const cTs = getRootFile(multiFolder, cTsFile, "c/index.ts");
+
+                        const configToBuild = multiFolder ? "c/tsconfig.json" : "tsconfig.c.json";
+                        const aTsconfig = getTsConfigFile(multiFolder, aTsconfigFile, "a");
+                        const bTsconfig = getTsConfigFile(multiFolder, bTsconfigFile, "b");
+                        const cTsconfig = getTsConfigFile(multiFolder, cTsconfigFile, "c");
+
+                        // if (multiFolder) {
+                        //     writeFile(aTs);
+                        //     writeFile(bTs);
+                        //     writeFile(cTs);
+                        //     writeFile(aTsconfig);
+                        //     writeFile(bTsconfig);
+                        //     writeFile(cTsconfig);
+                        // }
+
+                        const allFiles = [libFile, aTs, bTs, cTs, aTsconfig, bTsconfig, cTsconfig, refs];
+                        const aDts = dtsFile(multiFolder ? "a/index" : "a"), bDts = dtsFile(multiFolder ? "b/index" : "b");
+                        const expectedFiles = [jsFile(multiFolder ? "a/index" : "a"), aDts, jsFile(multiFolder ? "b/index" : "b"), bDts, jsFile(multiFolder ? "c/index" : "c")];
+                        const expectedProgramFiles = [cTs.path, libFile.path, aDts, refs.path, bDts];
+                        const expectedWatchedFiles = expectedProgramFiles.concat(cTsconfig.path, bTsconfig.path, aTsconfig.path).map(s => s.toLowerCase());
+                        const expectedWatchedDirectories = multiFolder ? [
+                            getProjectPath(project).toLowerCase() // watches for directories created for resolution of b
+                        ] : emptyArray;
+                        const nrefsPath = multiFolder ? ["../nrefs/*"] : ["./nrefs/*"];
+                        const expectedWatchedDirectoriesRecursive = [
+                            ...(multiFolder ? [
+                                getFilePathInProject(project, "a"), // Failed to package json
+                                getFilePathInProject(project, "b"), // Failed to package json
+                            ] : []),
+                            getFilePathInProject(project, "refs"), // Failed lookup since refs/a.ts does not exist
+                            ...projectSystem.getTypeRootsFromLocation(multiFolder ? getFilePathInProject(project, "c") : getProjectPath(project))
+                        ].map(s => s.toLowerCase());
+
+                        const defaultDependencies: ReadonlyArray<[string, ReadonlyArray<string>]> = [
+                            [aDts, [aDts]],
+                            [bDts, [bDts, aDts]],
+                            [refs.path, [refs.path]],
+                            [cTs.path, [cTs.path, refs.path, bDts]]
+                        ];
+
+                        function createSolutionAndWatchMode() {
+                            return createSolutionAndWatchModeOfProject(allFiles, getProjectPath(project), configToBuild, configToBuild, getOutputFileStamps);
+                        }
+
+                        function createSolutionAndService() {
+                            return createSolutionAndServiceOfProject(allFiles, getProjectPath(project), configToBuild, cTs.path, getOutputFileStamps);
+                        }
+
+                        function getOutputFileStamps(host: WatchedSystem) {
+                            return expectedFiles.map(file => [file, host.getModifiedTime(file)] as OutputFileStamp);
+                        }
+
+                        function verifyProgram(host: WatchedSystem, watch: Watch) {
+                            verifyWatchState(host, watch, expectedProgramFiles, expectedWatchedFiles, expectedWatchedDirectoriesRecursive, defaultDependencies, expectedWatchedDirectories);
+                        }
+
+                        function verifyProject(host: WatchedSystem, service: projectSystem.TestProjectService, orphanInfos?: ReadonlyArray<string>) {
+                            verifyServerState(host, service, expectedProgramFiles, expectedWatchedFiles, expectedWatchedDirectoriesRecursive, orphanInfos);
+                        }
+
+                        function verifyServerState(
+                            host: WatchedSystem,
+                            service: projectSystem.TestProjectService,
+                            expectedProgramFiles: ReadonlyArray<string>,
+                            expectedWatchedFiles: ReadonlyArray<string>,
+                            expectedWatchedDirectoriesRecursive: ReadonlyArray<string>,
+                            orphanInfos?: ReadonlyArray<string>) {
+                            checkProjectActualFiles(service, cTsconfig.path, expectedProgramFiles.concat(cTsconfig.path));
+                            const watchedFiles = expectedWatchedFiles.filter(f => f !== cTs.path.toLowerCase());
+                            if (orphanInfos) {
+                                for (const orphan of orphanInfos) {
+                                    const info = service.getScriptInfoForPath(orphan as Path);
+                                    assert.isDefined(info);
+                                    assert.equal(info!.containingProjects.length, 0);
+                                    watchedFiles.push(orphan);
+                                }
+                            }
+                            verifyWatchesOfProject(host, watchedFiles, expectedWatchedDirectoriesRecursive, expectedWatchedDirectories);
+                        }
+
+                        function verifyScenario(
+                            edit: (host: WatchedSystem, solutionBuilder: SolutionBuilder) => void,
+                            expectedEditErrors: ReadonlyArray<string>,
+                            expectedProgramFiles: ReadonlyArray<string>,
+                            expectedWatchedFiles: ReadonlyArray<string>,
+                            expectedWatchedDirectoriesRecursive: ReadonlyArray<string>,
+                            dependencies: ReadonlyArray<[string, ReadonlyArray<string>]>,
+                            revert?: (host: WatchedSystem) => void,
+                            orphanInfosAfterEdit?: ReadonlyArray<string>,
+                            orphanInfosAfterRevert?: ReadonlyArray<string>) {
+                            it("with tsc-watch", () => {
+                                const { host, solutionBuilder, watch } = createSolutionAndWatchMode();
+
+                                edit(host, solutionBuilder);
+
+                                host.checkTimeoutQueueLengthAndRun(1);
+                                checkOutputErrorsIncremental(host, expectedEditErrors);
+                                verifyWatchState(host, watch, expectedProgramFiles, expectedWatchedFiles, expectedWatchedDirectoriesRecursive, dependencies, expectedWatchedDirectories);
+
+                                if (revert) {
+                                    revert(host);
+
+                                    host.checkTimeoutQueueLengthAndRun(1);
+                                    checkOutputErrorsIncremental(host, emptyArray);
+                                    verifyProgram(host, watch);
+                                }
+                            });
+
+                            if (!multiFolder) return; // With side by side file open is in inferred project without any settings
+
+                            it("with tsserver", () => {
+                                const { host, solutionBuilder, service } = createSolutionAndService();
+
+                                edit(host, solutionBuilder);
+
+                                host.checkTimeoutQueueLengthAndRun(2);
+                                verifyServerState(host, service, expectedProgramFiles, expectedWatchedFiles, expectedWatchedDirectoriesRecursive, orphanInfosAfterEdit);
+
+                                if (revert) {
+                                    revert(host);
+
+                                    host.checkTimeoutQueueLengthAndRun(2);
+                                    verifyProject(host, service, orphanInfosAfterRevert);
+                                }
+                            });
+                        }
+
+                        describe("verifies dependencies and watches", () => {
+                            // Initial build
+                            it("with tsc-watch", () => {
+                                const { host, watch } = createSolutionAndWatchMode();
+                                verifyProgram(host, watch);
+                            });
+                            if (!multiFolder) return;
+                            it("with tsserver", () => {
+                                const { host, service } = createSolutionAndService();
+                                verifyProject(host, service);
+                            });
+                        });
+
+                        describe("non local edit updates the program and watch correctly", () => {
+                            verifyScenario(
+                                (host, solutionBuilder) => {
+                                    // edit
+                                    host.writeFile(bTs.path, `${bTs.content}
+export function gfoo() {
+}`);
+                                    solutionBuilder.invalidateProject(bTsconfig.path);
+                                    solutionBuilder.buildInvalidatedProject();
+                                },
+                                emptyArray,
+                                expectedProgramFiles,
+                                expectedWatchedFiles,
+                                expectedWatchedDirectoriesRecursive,
+                                defaultDependencies);
+                        });
+
+                        describe("edit on config file", () => {
+                            const nrefReplacer = (f: string) => f.replace("refs", "nrefs");
+                            const nrefs: File = {
+                                path: getFilePathInProject(project, "nrefs/a.d.ts"),
+                                content: refs.content
+                            };
+                            verifyScenario(
+                                host => {
+                                    const cTsConfigJson = JSON.parse(cTsconfig.content);
+                                    host.ensureFileOrFolder(nrefs);
+                                    cTsConfigJson.compilerOptions.paths = { "@ref/*": nrefsPath };
+                                    host.writeFile(cTsconfig.path, JSON.stringify(cTsConfigJson));
+                                },
+                                emptyArray,
+                                expectedProgramFiles.map(nrefReplacer),
+                                expectedWatchedFiles.map(nrefReplacer),
+                                expectedWatchedDirectoriesRecursive.map(nrefReplacer),
+                                [
+                                    [aDts, [aDts]],
+                                    [bDts, [bDts, aDts]],
+                                    [nrefs.path, [nrefs.path]],
+                                    [cTs.path, [cTs.path, nrefs.path, bDts]]
+                                ],
+                                // revert the update
+                                host => host.writeFile(cTsconfig.path, cTsconfig.content),
+                                // AfterEdit:: Extra watched files on server since the script infos arent deleted till next file open
+                                [refs.path.toLowerCase()],
+                                // AfterRevert:: Extra watched files on server since the script infos arent deleted till next file open
+                                [nrefs.path.toLowerCase()]
+                            );
+                        });
+
+                        describe("edit in referenced config file", () => {
+                            const nrefs: File = {
+                                path: getFilePathInProject(project, "nrefs/a.d.ts"),
+                                content: "export declare class A {}"
+                            };
+                            const expectedProgramFiles = [cTs.path, bDts, nrefs.path, refs.path, libFile.path];
+                            const [, ...expectedWatchedDirectoriesRecursiveWithoutA] = expectedWatchedDirectoriesRecursive; // Not looking in a folder for resolution in multi folder scenario
+                            verifyScenario(
+                                host => {
+                                    const bTsConfigJson = JSON.parse(bTsconfig.content);
+                                    host.ensureFileOrFolder(nrefs);
+                                    bTsConfigJson.compilerOptions.paths = { "@ref/*": nrefsPath };
+                                    host.writeFile(bTsconfig.path, JSON.stringify(bTsConfigJson));
+                                },
+                                emptyArray,
+                                expectedProgramFiles,
+                                expectedProgramFiles.concat(cTsconfig.path, bTsconfig.path, aTsconfig.path).map(s => s.toLowerCase()),
+                                (multiFolder ? expectedWatchedDirectoriesRecursiveWithoutA : expectedWatchedDirectoriesRecursive).concat(getFilePathInProject(project, "nrefs").toLowerCase()),
+                                [
+                                    [nrefs.path, [nrefs.path]],
+                                    [bDts, [bDts, nrefs.path]],
+                                    [refs.path, [refs.path]],
+                                    [cTs.path, [cTs.path, refs.path, bDts]],
+                                ],
+                                // revert the update
+                                host => host.writeFile(bTsconfig.path, bTsconfig.content),
+                                // AfterEdit:: Extra watched files on server since the script infos arent deleted till next file open
+                                [aDts.toLowerCase()],
+                                // AfterRevert:: Extra watched files on server since the script infos arent deleted till next file open
+                                [nrefs.path.toLowerCase()]
+                            );
+                        });
+
+                        describe("deleting referenced config file", () => {
+                            const expectedProgramFiles = [cTs.path, bTs.path, refs.path, libFile.path];
+                            const [, ...expectedWatchedDirectoriesRecursiveWithoutA] = expectedWatchedDirectoriesRecursive; // Not looking in a folder for resolution in multi folder scenario
+                            // Resolutions should change now
+                            // Should map to b.ts instead with options from our own config
+                            verifyScenario(
+                                host => host.deleteFile(bTsconfig.path),
+                                [
+                                    `${multiFolder ? "c/tsconfig.json" : "tsconfig.c.json"}(9,21): error TS6053: File '/user/username/projects/transitiveReferences/${multiFolder ? "b" : "tsconfig.b.json"}' not found.\n`
+                                ],
+                                expectedProgramFiles,
+                                expectedProgramFiles.concat(cTsconfig.path, bTsconfig.path).map(s => s.toLowerCase()),
+                                multiFolder ? expectedWatchedDirectoriesRecursiveWithoutA : expectedWatchedDirectoriesRecursive,
+                                [
+                                    [bTs.path, [bTs.path, refs.path]],
+                                    [refs.path, [refs.path]],
+                                    [cTs.path, [cTs.path, refs.path, bTs.path]],
+                                ],
+                                // revert the update
+                                host => host.writeFile(bTsconfig.path, bTsconfig.content),
+                                // AfterEdit:: Extra watched files on server since the script infos arent deleted till next file open
+                                [bDts.toLowerCase(), aDts.toLowerCase(), aTsconfig.path.toLowerCase()],
+                                // AfterRevert:: Extra watched files on server since the script infos arent deleted till next file open
+                                [bTs.path.toLowerCase()]
+                            );
+                        });
+
+                        describe("deleting transitively referenced config file", () => {
+                            verifyScenario(
+                                host => host.deleteFile(aTsconfig.path),
+                                [
+                                    `${multiFolder ? "b/tsconfig.json" : "tsconfig.b.json"}(10,21): error TS6053: File '/user/username/projects/transitiveReferences/${multiFolder ? "a" : "tsconfig.a.json"}' not found.\n`
+                                ],
+                                expectedProgramFiles.map(s => s.replace(aDts, aTs.path)),
+                                expectedWatchedFiles.map(s => s.replace(aDts.toLowerCase(), aTs.path.toLocaleLowerCase())),
+                                expectedWatchedDirectoriesRecursive,
+                                [
+                                    [aTs.path, [aTs.path]],
+                                    [bDts, [bDts, aTs.path]],
+                                    [refs.path, [refs.path]],
+                                    [cTs.path, [cTs.path, refs.path, bDts]],
+                                ],
+                                // revert the update
+                                host => host.writeFile(aTsconfig.path, aTsconfig.content),
+                                // AfterEdit:: Extra watched files on server since the script infos arent deleted till next file open
+                                [aDts.toLowerCase()],
+                                // AfterRevert:: Extra watched files on server since the script infos arent deleted till next file open
+                                [aTs.path.toLowerCase()]
+                            );
+                        });
+                    }
+
+                    describe("when config files are side by side", () => {
+                        verifyTransitiveReferences(/*multiFolder*/ false);
+
+                        it("when referenced project uses different module resolution", () => {
+                            const bTs: File = {
+                                path: bTsFile.path,
+                                content: `import {A} from "a";export const b = new A();`
+                            };
+                            const bTsconfig: File = {
+                                path: bTsconfigFile.path,
+                                content: JSON.stringify({
+                                    compilerOptions: { composite: true, moduleResolution: "classic" },
+                                    files: ["b.ts"],
+                                    references: [{ path: "tsconfig.a.json" }]
+                                })
+                            };
+                            const allFiles = [libFile, aTsFile, bTs, cTsFile, aTsconfigFile, bTsconfig, cTsconfigFile, refs];
+                            const aDts = dtsFile("a"), bDts = dtsFile("b");
+                            const expectedFiles = [jsFile("a"), aDts, jsFile("b"), bDts, jsFile("c")];
+                            const expectedProgramFiles = [cTsFile.path, libFile.path, aDts, refs.path, bDts];
+                            const expectedWatchedFiles = expectedProgramFiles.concat(cTsconfigFile.path, bTsconfigFile.path, aTsconfigFile.path).map(s => s.toLowerCase());
+                            const expectedWatchedDirectoriesRecursive = [
+                                getFilePathInProject(project, "refs"), // Failed lookup since refs/a.ts does not exist
+                                ...projectSystem.getTypeRootsFromLocation(getProjectPath(project))
+                            ].map(s => s.toLowerCase());
+
+                            const defaultDependencies: ReadonlyArray<[string, ReadonlyArray<string>]> = [
+                                [aDts, [aDts]],
+                                [bDts, [bDts, aDts]],
+                                [refs.path, [refs.path]],
+                                [cTsFile.path, [cTsFile.path, refs.path, bDts]]
+                            ];
+                            function getOutputFileStamps(host: WatchedSystem) {
+                                return expectedFiles.map(file => [file, host.getModifiedTime(file)] as OutputFileStamp);
+                            }
+                            const { host, watch } = createSolutionAndWatchModeOfProject(allFiles, getProjectPath(project), "tsconfig.c.json", "tsconfig.c.json", getOutputFileStamps);
+                            verifyWatchState(host, watch, expectedProgramFiles, expectedWatchedFiles, expectedWatchedDirectoriesRecursive, defaultDependencies);
+                        });
+                    });
+                    describe("when config files are in side by side folders", () => {
+                        verifyTransitiveReferences(/*multiFolder*/ true);
+                    });
                 });
             });
         });
diff --git a/src/testRunner/unittests/tscWatchMode.ts b/src/testRunner/unittests/tscWatchMode.ts
index 7678bfe0625..fe5d400d30e 100644
--- a/src/testRunner/unittests/tscWatchMode.ts
+++ b/src/testRunner/unittests/tscWatchMode.ts
@@ -12,11 +12,11 @@ namespace ts.tscWatch {
     export import checkOutputDoesNotContain = TestFSWithWatch.checkOutputDoesNotContain;
     export import Tsc_WatchDirectory = TestFSWithWatch.Tsc_WatchDirectory;
 
-    export function checkProgramActualFiles(program: Program, expectedFiles: string[]) {
+    export function checkProgramActualFiles(program: Program, expectedFiles: ReadonlyArray<string>) {
         checkArray(`Program actual files`, program.getSourceFiles().map(file => file.fileName), expectedFiles);
     }
 
-    export function checkProgramRootFiles(program: Program, expectedFiles: string[]) {
+    export function checkProgramRootFiles(program: Program, expectedFiles: ReadonlyArray<string>) {
         checkArray(`Program rootFileNames`, program.getRootFileNames(), expectedFiles);
     }
 
diff --git a/src/testRunner/unittests/tsserverProjectSystem.ts b/src/testRunner/unittests/tsserverProjectSystem.ts
index 77c486f3f67..9d00047c1ce 100644
--- a/src/testRunner/unittests/tsserverProjectSystem.ts
+++ b/src/testRunner/unittests/tsserverProjectSystem.ts
@@ -405,11 +405,11 @@ namespace ts.projectSystem {
         return values.next().value;
     }
 
-    export function checkProjectActualFiles(project: server.Project, expectedFiles: string[]) {
+    export function checkProjectActualFiles(project: server.Project, expectedFiles: ReadonlyArray<string>) {
         checkArray(`${server.ProjectKind[project.projectKind]} project, actual files`, project.getFileNames(), expectedFiles);
     }
 
-    function checkProjectRootFiles(project: server.Project, expectedFiles: string[]) {
+    function checkProjectRootFiles(project: server.Project, expectedFiles: ReadonlyArray<string>) {
         checkArray(`${server.ProjectKind[project.projectKind]} project, rootFileNames`, project.getRootFiles(), expectedFiles);
     }
 
@@ -5114,7 +5114,7 @@ namespace ts.projectSystem {
 
         function getFileNotFoundDiagnostic(configFile: File, relativeFileName: string): ConfigFileDiagnostic {
             const findString = `{"path":"./${relativeFileName}"}`;
-            const d = Diagnostics.File_0_does_not_exist;
+            const d = Diagnostics.File_0_not_found;
             const start = configFile.content.indexOf(findString);
             return {
                 fileName: configFile.path,
diff --git a/tests/baselines/reference/api/tsserverlibrary.d.ts b/tests/baselines/reference/api/tsserverlibrary.d.ts
index a4cb439e623..00b93acbba5 100644
--- a/tests/baselines/reference/api/tsserverlibrary.d.ts
+++ b/tests/baselines/reference/api/tsserverlibrary.d.ts
@@ -1813,11 +1813,12 @@ declare namespace ts {
         isSourceFileFromExternalLibrary(file: SourceFile): boolean;
         isSourceFileDefaultLibrary(file: SourceFile): boolean;
         getProjectReferences(): ReadonlyArray<ProjectReference> | undefined;
-        getResolvedProjectReferences(): (ResolvedProjectReference | undefined)[] | undefined;
+        getResolvedProjectReferences(): ReadonlyArray<ResolvedProjectReference | undefined> | undefined;
     }
     interface ResolvedProjectReference {
         commandLine: ParsedCommandLine;
         sourceFile: SourceFile;
+        references?: ReadonlyArray<ResolvedProjectReference | undefined>;
     }
     interface CustomTransformers {
         /** Custom transformers to evaluate before built-in .js transformations. */
@@ -2687,11 +2688,11 @@ declare namespace ts {
         useCaseSensitiveFileNames(): boolean;
         getNewLine(): string;
         readDirectory?(rootDir: string, extensions: ReadonlyArray<string>, excludes: ReadonlyArray<string> | undefined, includes: ReadonlyArray<string>, depth?: number): string[];
-        resolveModuleNames?(moduleNames: string[], containingFile: string, reusedNames?: string[]): (ResolvedModule | undefined)[];
+        resolveModuleNames?(moduleNames: string[], containingFile: string, reusedNames?: string[], redirectedReference?: ResolvedProjectReference): (ResolvedModule | undefined)[];
         /**
          * This method is a companion for 'resolveModuleNames' and is used to resolve 'types' references to actual type declaration files
          */
-        resolveTypeReferenceDirectives?(typeReferenceDirectiveNames: string[], containingFile: string): ResolvedTypeReferenceDirective[];
+        resolveTypeReferenceDirectives?(typeReferenceDirectiveNames: string[], containingFile: string, redirectedReference?: ResolvedProjectReference): ResolvedTypeReferenceDirective[];
         getEnvironmentVariable?(name: string): string | undefined;
         createHash?(data: string): string;
     }
@@ -3605,7 +3606,7 @@ declare namespace ts {
      * This is possible in case if resolution is performed for directives specified via 'types' parameter. In this case initial path for secondary lookups
      * is assumed to be the same as root directory of the project.
      */
-    function resolveTypeReferenceDirective(typeReferenceDirectiveName: string, containingFile: string | undefined, options: CompilerOptions, host: ModuleResolutionHost): ResolvedTypeReferenceDirectiveWithFailedLookupLocations;
+    function resolveTypeReferenceDirective(typeReferenceDirectiveName: string, containingFile: string | undefined, options: CompilerOptions, host: ModuleResolutionHost, redirectedReference?: ResolvedProjectReference): ResolvedTypeReferenceDirectiveWithFailedLookupLocations;
     /**
      * Given a set of options, returns the set of type directive names
      *   that should be included for this program automatically.
@@ -3620,14 +3621,14 @@ declare namespace ts {
      * This assumes that any module id will have the same resolution for sibling files located in the same folder.
      */
     interface ModuleResolutionCache extends NonRelativeModuleNameResolutionCache {
-        getOrCreateCacheForDirectory(directoryName: string): Map<ResolvedModuleWithFailedLookupLocations>;
+        getOrCreateCacheForDirectory(directoryName: string, redirectedReference?: ResolvedProjectReference): Map<ResolvedModuleWithFailedLookupLocations>;
     }
     /**
      * Stored map from non-relative module name to a table: directory -> result of module lookup in this directory
      * We support only non-relative module names because resolution of relative module names is usually more deterministic and thus less expensive.
      */
     interface NonRelativeModuleNameResolutionCache {
-        getOrCreateCacheForModuleName(nonRelativeModuleName: string): PerModuleNameCache;
+        getOrCreateCacheForModuleName(nonRelativeModuleName: string, redirectedReference?: ResolvedProjectReference): PerModuleNameCache;
     }
     interface PerModuleNameCache {
         get(directory: string): ResolvedModuleWithFailedLookupLocations | undefined;
@@ -3635,9 +3636,9 @@ declare namespace ts {
     }
     function createModuleResolutionCache(currentDirectory: string, getCanonicalFileName: (s: string) => string): ModuleResolutionCache;
     function resolveModuleNameFromCache(moduleName: string, containingFile: string, cache: ModuleResolutionCache): ResolvedModuleWithFailedLookupLocations | undefined;
-    function resolveModuleName(moduleName: string, containingFile: string, compilerOptions: CompilerOptions, host: ModuleResolutionHost, cache?: ModuleResolutionCache): ResolvedModuleWithFailedLookupLocations;
-    function nodeModuleNameResolver(moduleName: string, containingFile: string, compilerOptions: CompilerOptions, host: ModuleResolutionHost, cache?: ModuleResolutionCache): ResolvedModuleWithFailedLookupLocations;
-    function classicNameResolver(moduleName: string, containingFile: string, compilerOptions: CompilerOptions, host: ModuleResolutionHost, cache?: NonRelativeModuleNameResolutionCache): ResolvedModuleWithFailedLookupLocations;
+    function resolveModuleName(moduleName: string, containingFile: string, compilerOptions: CompilerOptions, host: ModuleResolutionHost, cache?: ModuleResolutionCache, redirectedReference?: ResolvedProjectReference): ResolvedModuleWithFailedLookupLocations;
+    function nodeModuleNameResolver(moduleName: string, containingFile: string, compilerOptions: CompilerOptions, host: ModuleResolutionHost, cache?: ModuleResolutionCache, redirectedReference?: ResolvedProjectReference): ResolvedModuleWithFailedLookupLocations;
+    function classicNameResolver(moduleName: string, containingFile: string, compilerOptions: CompilerOptions, host: ModuleResolutionHost, cache?: NonRelativeModuleNameResolutionCache, redirectedReference?: ResolvedProjectReference): ResolvedModuleWithFailedLookupLocations;
 }
 declare namespace ts {
     function createNodeArray<T extends Node>(elements?: ReadonlyArray<T>, hasTrailingComma?: boolean): NodeArray<T>;
@@ -4383,9 +4384,9 @@ declare namespace ts {
         /** If provided is used to get the environment variable */
         getEnvironmentVariable?(name: string): string | undefined;
         /** If provided, used to resolve the module names, otherwise typescript's default module resolution */
-        resolveModuleNames?(moduleNames: string[], containingFile: string, reusedNames?: string[]): ResolvedModule[];
+        resolveModuleNames?(moduleNames: string[], containingFile: string, reusedNames?: string[], redirectedReference?: ResolvedProjectReference): ResolvedModule[];
         /** If provided, used to resolve type reference directives, otherwise typescript's default resolution */
-        resolveTypeReferenceDirectives?(typeReferenceDirectiveNames: string[], containingFile: string): ResolvedTypeReferenceDirective[];
+        resolveTypeReferenceDirectives?(typeReferenceDirectiveNames: string[], containingFile: string, redirectedReference?: ResolvedProjectReference): ResolvedTypeReferenceDirective[];
     }
     /**
      * Host to create watch with root files and options
@@ -4653,9 +4654,9 @@ declare namespace ts {
         realpath?(path: string): string;
         fileExists?(path: string): boolean;
         getTypeRootsVersion?(): number;
-        resolveModuleNames?(moduleNames: string[], containingFile: string, reusedNames?: string[]): ResolvedModule[];
+        resolveModuleNames?(moduleNames: string[], containingFile: string, reusedNames?: string[], redirectedReference?: ResolvedProjectReference): ResolvedModule[];
         getResolvedModuleWithFailedLookupLocationsFromCache?(modulename: string, containingFile: string): ResolvedModuleWithFailedLookupLocations | undefined;
-        resolveTypeReferenceDirectives?(typeDirectiveNames: string[], containingFile: string): ResolvedTypeReferenceDirective[];
+        resolveTypeReferenceDirectives?(typeDirectiveNames: string[], containingFile: string, redirectedReference?: ResolvedProjectReference): ResolvedTypeReferenceDirective[];
         getDirectories?(directoryName: string): string[];
         /**
          * Gets a set of custom transformers to use during emit.
@@ -8134,7 +8135,7 @@ declare namespace ts.server {
         getCompilerOptions(): CompilerOptions;
         getNewLine(): string;
         getProjectVersion(): string;
-        getProjectReferences(): ReadonlyArray<ProjectReference>;
+        getProjectReferences(): ReadonlyArray<ProjectReference> | undefined;
         getScriptFileNames(): string[];
         private getOrCreateScriptInfoAndAttachToProject;
         getScriptKind(fileName: string): ScriptKind;
@@ -8148,9 +8149,9 @@ declare namespace ts.server {
         readFile(fileName: string): string | undefined;
         writeFile(fileName: string, content: string): void;
         fileExists(file: string): boolean;
-        resolveModuleNames(moduleNames: string[], containingFile: string, reusedNames?: string[]): ResolvedModuleFull[];
+        resolveModuleNames(moduleNames: string[], containingFile: string, reusedNames?: string[], redirectedReference?: ResolvedProjectReference): ResolvedModuleFull[];
         getResolvedModuleWithFailedLookupLocationsFromCache(moduleName: string, containingFile: string): ResolvedModuleWithFailedLookupLocations | undefined;
-        resolveTypeReferenceDirectives(typeDirectiveNames: string[], containingFile: string): ResolvedTypeReferenceDirective[];
+        resolveTypeReferenceDirectives(typeDirectiveNames: string[], containingFile: string, redirectedReference?: ResolvedProjectReference): ResolvedTypeReferenceDirective[];
         directoryExists(path: string): boolean;
         getDirectories(path: string): string[];
         log(s: string): void;
@@ -8251,7 +8252,7 @@ declare namespace ts.server {
          */
         updateGraph(): boolean;
         getConfigFilePath(): NormalizedPath;
-        getProjectReferences(): ReadonlyArray<ProjectReference>;
+        getProjectReferences(): ReadonlyArray<ProjectReference> | undefined;
         updateReferences(refs: ReadonlyArray<ProjectReference> | undefined): void;
         enablePlugins(): void;
         /**
diff --git a/tests/baselines/reference/api/typescript.d.ts b/tests/baselines/reference/api/typescript.d.ts
index 89007faa746..34b5ade8841 100644
--- a/tests/baselines/reference/api/typescript.d.ts
+++ b/tests/baselines/reference/api/typescript.d.ts
@@ -1813,11 +1813,12 @@ declare namespace ts {
         isSourceFileFromExternalLibrary(file: SourceFile): boolean;
         isSourceFileDefaultLibrary(file: SourceFile): boolean;
         getProjectReferences(): ReadonlyArray<ProjectReference> | undefined;
-        getResolvedProjectReferences(): (ResolvedProjectReference | undefined)[] | undefined;
+        getResolvedProjectReferences(): ReadonlyArray<ResolvedProjectReference | undefined> | undefined;
     }
     interface ResolvedProjectReference {
         commandLine: ParsedCommandLine;
         sourceFile: SourceFile;
+        references?: ReadonlyArray<ResolvedProjectReference | undefined>;
     }
     interface CustomTransformers {
         /** Custom transformers to evaluate before built-in .js transformations. */
@@ -2687,11 +2688,11 @@ declare namespace ts {
         useCaseSensitiveFileNames(): boolean;
         getNewLine(): string;
         readDirectory?(rootDir: string, extensions: ReadonlyArray<string>, excludes: ReadonlyArray<string> | undefined, includes: ReadonlyArray<string>, depth?: number): string[];
-        resolveModuleNames?(moduleNames: string[], containingFile: string, reusedNames?: string[]): (ResolvedModule | undefined)[];
+        resolveModuleNames?(moduleNames: string[], containingFile: string, reusedNames?: string[], redirectedReference?: ResolvedProjectReference): (ResolvedModule | undefined)[];
         /**
          * This method is a companion for 'resolveModuleNames' and is used to resolve 'types' references to actual type declaration files
          */
-        resolveTypeReferenceDirectives?(typeReferenceDirectiveNames: string[], containingFile: string): ResolvedTypeReferenceDirective[];
+        resolveTypeReferenceDirectives?(typeReferenceDirectiveNames: string[], containingFile: string, redirectedReference?: ResolvedProjectReference): ResolvedTypeReferenceDirective[];
         getEnvironmentVariable?(name: string): string | undefined;
         createHash?(data: string): string;
     }
@@ -3605,7 +3606,7 @@ declare namespace ts {
      * This is possible in case if resolution is performed for directives specified via 'types' parameter. In this case initial path for secondary lookups
      * is assumed to be the same as root directory of the project.
      */
-    function resolveTypeReferenceDirective(typeReferenceDirectiveName: string, containingFile: string | undefined, options: CompilerOptions, host: ModuleResolutionHost): ResolvedTypeReferenceDirectiveWithFailedLookupLocations;
+    function resolveTypeReferenceDirective(typeReferenceDirectiveName: string, containingFile: string | undefined, options: CompilerOptions, host: ModuleResolutionHost, redirectedReference?: ResolvedProjectReference): ResolvedTypeReferenceDirectiveWithFailedLookupLocations;
     /**
      * Given a set of options, returns the set of type directive names
      *   that should be included for this program automatically.
@@ -3620,14 +3621,14 @@ declare namespace ts {
      * This assumes that any module id will have the same resolution for sibling files located in the same folder.
      */
     interface ModuleResolutionCache extends NonRelativeModuleNameResolutionCache {
-        getOrCreateCacheForDirectory(directoryName: string): Map<ResolvedModuleWithFailedLookupLocations>;
+        getOrCreateCacheForDirectory(directoryName: string, redirectedReference?: ResolvedProjectReference): Map<ResolvedModuleWithFailedLookupLocations>;
     }
     /**
      * Stored map from non-relative module name to a table: directory -> result of module lookup in this directory
      * We support only non-relative module names because resolution of relative module names is usually more deterministic and thus less expensive.
      */
     interface NonRelativeModuleNameResolutionCache {
-        getOrCreateCacheForModuleName(nonRelativeModuleName: string): PerModuleNameCache;
+        getOrCreateCacheForModuleName(nonRelativeModuleName: string, redirectedReference?: ResolvedProjectReference): PerModuleNameCache;
     }
     interface PerModuleNameCache {
         get(directory: string): ResolvedModuleWithFailedLookupLocations | undefined;
@@ -3635,9 +3636,9 @@ declare namespace ts {
     }
     function createModuleResolutionCache(currentDirectory: string, getCanonicalFileName: (s: string) => string): ModuleResolutionCache;
     function resolveModuleNameFromCache(moduleName: string, containingFile: string, cache: ModuleResolutionCache): ResolvedModuleWithFailedLookupLocations | undefined;
-    function resolveModuleName(moduleName: string, containingFile: string, compilerOptions: CompilerOptions, host: ModuleResolutionHost, cache?: ModuleResolutionCache): ResolvedModuleWithFailedLookupLocations;
-    function nodeModuleNameResolver(moduleName: string, containingFile: string, compilerOptions: CompilerOptions, host: ModuleResolutionHost, cache?: ModuleResolutionCache): ResolvedModuleWithFailedLookupLocations;
-    function classicNameResolver(moduleName: string, containingFile: string, compilerOptions: CompilerOptions, host: ModuleResolutionHost, cache?: NonRelativeModuleNameResolutionCache): ResolvedModuleWithFailedLookupLocations;
+    function resolveModuleName(moduleName: string, containingFile: string, compilerOptions: CompilerOptions, host: ModuleResolutionHost, cache?: ModuleResolutionCache, redirectedReference?: ResolvedProjectReference): ResolvedModuleWithFailedLookupLocations;
+    function nodeModuleNameResolver(moduleName: string, containingFile: string, compilerOptions: CompilerOptions, host: ModuleResolutionHost, cache?: ModuleResolutionCache, redirectedReference?: ResolvedProjectReference): ResolvedModuleWithFailedLookupLocations;
+    function classicNameResolver(moduleName: string, containingFile: string, compilerOptions: CompilerOptions, host: ModuleResolutionHost, cache?: NonRelativeModuleNameResolutionCache, redirectedReference?: ResolvedProjectReference): ResolvedModuleWithFailedLookupLocations;
 }
 declare namespace ts {
     function createNodeArray<T extends Node>(elements?: ReadonlyArray<T>, hasTrailingComma?: boolean): NodeArray<T>;
@@ -4383,9 +4384,9 @@ declare namespace ts {
         /** If provided is used to get the environment variable */
         getEnvironmentVariable?(name: string): string | undefined;
         /** If provided, used to resolve the module names, otherwise typescript's default module resolution */
-        resolveModuleNames?(moduleNames: string[], containingFile: string, reusedNames?: string[]): ResolvedModule[];
+        resolveModuleNames?(moduleNames: string[], containingFile: string, reusedNames?: string[], redirectedReference?: ResolvedProjectReference): ResolvedModule[];
         /** If provided, used to resolve type reference directives, otherwise typescript's default resolution */
-        resolveTypeReferenceDirectives?(typeReferenceDirectiveNames: string[], containingFile: string): ResolvedTypeReferenceDirective[];
+        resolveTypeReferenceDirectives?(typeReferenceDirectiveNames: string[], containingFile: string, redirectedReference?: ResolvedProjectReference): ResolvedTypeReferenceDirective[];
     }
     /**
      * Host to create watch with root files and options
@@ -4653,9 +4654,9 @@ declare namespace ts {
         realpath?(path: string): string;
         fileExists?(path: string): boolean;
         getTypeRootsVersion?(): number;
-        resolveModuleNames?(moduleNames: string[], containingFile: string, reusedNames?: string[]): ResolvedModule[];
+        resolveModuleNames?(moduleNames: string[], containingFile: string, reusedNames?: string[], redirectedReference?: ResolvedProjectReference): ResolvedModule[];
         getResolvedModuleWithFailedLookupLocationsFromCache?(modulename: string, containingFile: string): ResolvedModuleWithFailedLookupLocations | undefined;
-        resolveTypeReferenceDirectives?(typeDirectiveNames: string[], containingFile: string): ResolvedTypeReferenceDirective[];
+        resolveTypeReferenceDirectives?(typeDirectiveNames: string[], containingFile: string, redirectedReference?: ResolvedProjectReference): ResolvedTypeReferenceDirective[];
         getDirectories?(directoryName: string): string[];
         /**
          * Gets a set of custom transformers to use during emit.
diff --git a/tests/projects/transitiveReferences/a.ts b/tests/projects/transitiveReferences/a.ts
new file mode 100644
index 00000000000..56d3f8e39a0
--- /dev/null
+++ b/tests/projects/transitiveReferences/a.ts
@@ -0,0 +1 @@
+export class A {}
diff --git a/tests/projects/transitiveReferences/b.ts b/tests/projects/transitiveReferences/b.ts
new file mode 100644
index 00000000000..8b601a60765
--- /dev/null
+++ b/tests/projects/transitiveReferences/b.ts
@@ -0,0 +1,2 @@
+import {A} from '@ref/a';
+export const b = new A();
diff --git a/tests/projects/transitiveReferences/c.ts b/tests/projects/transitiveReferences/c.ts
new file mode 100644
index 00000000000..d45b2621f3e
--- /dev/null
+++ b/tests/projects/transitiveReferences/c.ts
@@ -0,0 +1,4 @@
+import {b} from './b';
+import {X} from "@ref/a";
+b;
+X;
\ No newline at end of file
diff --git a/tests/projects/transitiveReferences/refs/a.d.ts b/tests/projects/transitiveReferences/refs/a.d.ts
new file mode 100644
index 00000000000..9a5b34f9a2b
--- /dev/null
+++ b/tests/projects/transitiveReferences/refs/a.d.ts
@@ -0,0 +1,2 @@
+export class X {}
+export class A {}
diff --git a/tests/projects/transitiveReferences/tsconfig.a.json b/tests/projects/transitiveReferences/tsconfig.a.json
new file mode 100644
index 00000000000..74fe1ef8b56
--- /dev/null
+++ b/tests/projects/transitiveReferences/tsconfig.a.json
@@ -0,0 +1 @@
+{"compilerOptions": {"composite": true}, "files": ["a.ts"]}
diff --git a/tests/projects/transitiveReferences/tsconfig.b.json b/tests/projects/transitiveReferences/tsconfig.b.json
new file mode 100644
index 00000000000..f5e23c38b76
--- /dev/null
+++ b/tests/projects/transitiveReferences/tsconfig.b.json
@@ -0,0 +1,11 @@
+{
+    "compilerOptions": {
+        "composite": true,
+        "baseUrl": "./",
+        "paths": {
+            "@ref/*": [ "./*" ]
+        }
+    },
+    "files": [ "b.ts" ],
+    "references": [ { "path": "tsconfig.a.json" } ]
+}
diff --git a/tests/projects/transitiveReferences/tsconfig.c.json b/tests/projects/transitiveReferences/tsconfig.c.json
new file mode 100644
index 00000000000..c9ddec97111
--- /dev/null
+++ b/tests/projects/transitiveReferences/tsconfig.c.json
@@ -0,0 +1,10 @@
+{
+    "files": [ "c.ts" ],
+    "compilerOptions": {
+        "baseUrl": "./",
+        "paths": {
+            "@ref/*": [ "./refs/*" ]
+        }
+    },
+    "references": [ { "path": "tsconfig.b.json" } ]
+}