diff --git a/integration_tests/exclude_package/models/excluded_model.sql b/integration_tests/exclude_package/models/excluded_model.sql
deleted file mode 100644
index 26d9cae7..00000000
--- a/integration_tests/exclude_package/models/excluded_model.sql
+++ /dev/null
@@ -1 +0,0 @@
-select 1 as id
\ No newline at end of file
diff --git a/integration_tests/exclude_package/models/_models.yml b/integration_tests/exclude_package/models/staging/_models.yml
similarity index 100%
rename from integration_tests/exclude_package/models/_models.yml
rename to integration_tests/exclude_package/models/staging/_models.yml
diff --git a/integration_tests/exclude_package/models/staging/_sources.yml b/integration_tests/exclude_package/models/staging/_sources.yml
new file mode 100644
index 00000000..5a80acc6
--- /dev/null
+++ b/integration_tests/exclude_package/models/staging/_sources.yml
@@ -0,0 +1,4 @@
+sources:
+  - name: fake_source
+    tables:
+      - name: fake_source
\ No newline at end of file
diff --git a/integration_tests/exclude_package/models/staging/excluded_model.sql b/integration_tests/exclude_package/models/staging/excluded_model.sql
new file mode 100644
index 00000000..9db788df
--- /dev/null
+++ b/integration_tests/exclude_package/models/staging/excluded_model.sql
@@ -0,0 +1,2 @@
+-- {{ source('fake_source', 'fake_source') }}
+select 1 as id
\ No newline at end of file
diff --git a/models/marts/structure/fct_model_directories.sql b/models/marts/structure/fct_model_directories.sql
index a4feb756..80524cef 100644
--- a/models/marts/structure/fct_model_directories.sql
+++ b/models/marts/structure/fct_model_directories.sql
@@ -14,6 +14,7 @@ folders as (
 
 all_dag_relationships as (
     select * from {{ ref('int_all_dag_relationships') }}
+    where not child_is_excluded
 ),
 
 staging_models as (
@@ -56,7 +57,6 @@ innappropriate_subdirectories_non_staging_models as (
         on folders.model_type = all_graph_resources.model_type 
     -- either appropriate folder_name is not in the current_directory_path or a inappropriate folder name is closer to the file_name
     where all_graph_resources.model_type <> all_graph_resources.model_type_folder 
-    and not is_excluded
 ),
 
 unioned as (