diff --git a/cabal-install/Distribution/Client/ProjectBuilding.hs b/cabal-install/Distribution/Client/ProjectBuilding.hs
index 0f3ae1b64a2..da6920b0bf6 100644
--- a/cabal-install/Distribution/Client/ProjectBuilding.hs
+++ b/cabal-install/Distribution/Client/ProjectBuilding.hs
@@ -744,16 +744,21 @@ withTarballLocalDirectory verbosity distDirLayout@DistDirLayout{..}
                           tarball pkgid dparams buildstyle pkgTextOverride
                           buildPkg  =
       case buildstyle of
-        -- In this case we make a couple temp dirs, unpack the tarball to one
-        -- and build and install it from the other. We avoid nesting the
-        -- builddir under the tarball src dir to keep path name lengths down.
+        -- In this case we make a temp dir (e.g. tmp/src2345/), unpack
+        -- the tarball to it (e.g. tmp/src2345/foo-1.0/), and for
+        -- compatibility we put the dist dir within it
+        -- (i.e. tmp/src2345/foo-1.0/dist/).
+        --
+        -- Unfortunately, a few custom Setup.hs scripts do not respect
+        -- the --builddir flag and always look for it at ./dist/ so
+        -- this way we avoid breaking those packages
         BuildAndInstall ->
           let tmpdir = distTempDirectory in
-          withTempDirectory verbosity tmpdir "src"   $ \unpackdir ->
-          withTempDirectory verbosity tmpdir "build" $ \builddir -> do
+          withTempDirectory verbosity tmpdir "src"   $ \unpackdir -> do
             unpackPackageTarball verbosity tarball unpackdir
                                  pkgid pkgTextOverride
             let srcdir   = unpackdir </> display pkgid
+                builddir = srcdir </> "dist"
             buildPkg srcdir builddir
 
         -- In this case we make sure the tarball has been unpacked to the