diff --git a/packages/schema/src/cli/cli-util.ts b/packages/schema/src/cli/cli-util.ts
index 000e92ca7..85c38e82a 100644
--- a/packages/schema/src/cli/cli-util.ts
+++ b/packages/schema/src/cli/cli-util.ts
@@ -7,15 +7,15 @@ import { AstNode, getDocument, LangiumDocument, LangiumDocuments, Mutable } from
 import { NodeFileSystem } from 'langium/node';
 import path from 'path';
 import semver from 'semver';
+import { TextDocument } from 'vscode-languageserver-textdocument';
 import { URI } from 'vscode-uri';
 import { PLUGIN_MODULE_NAME, STD_LIB_MODULE_NAME } from '../language-server/constants';
+import { ZModelFormatter } from '../language-server/zmodel-formatter';
 import { createZModelServices, ZModelServices } from '../language-server/zmodel-module';
 import { mergeBaseModel, resolveImport, resolveTransitiveImports } from '../utils/ast-utils';
+import { findPackageJson } from '../utils/pkg-utils';
 import { getVersion } from '../utils/version-utils';
 import { CliError } from './cli-error';
-import { ZModelFormatter } from '../language-server/zmodel-formatter';
-import { TextDocument } from 'vscode-languageserver-textdocument';
-import { getPackageJson } from '../utils/pkg-utils';
 
 // required minimal version of Prisma
 export const requiredPrismaVersion = '4.8.0';
@@ -279,13 +279,19 @@ export async function formatDocument(fileName: string) {
 }
 
 export function getDefaultSchemaLocation() {
-    let location = path.resolve('schema.zmodel');
-
     // handle override from package.json
-    const pkgJson = getPackageJson();
-    if (typeof pkgJson?.zenstack?.schema === 'string') {
-        location = path.resolve(pkgJson.zenstack.schema);
+    const pkgJsonPath = findPackageJson();
+    if (pkgJsonPath) {
+        const pkgJson = JSON.parse(fs.readFileSync(pkgJsonPath, 'utf-8'));
+        if (typeof pkgJson?.zenstack?.schema === 'string') {
+            if (path.isAbsolute(pkgJson.zenstack.schema)) {
+                return pkgJson.zenstack.schema;
+            } else {
+                // resolve relative to package.json
+                return path.resolve(path.dirname(pkgJsonPath), pkgJson.zenstack.schema);
+            }
+        }
     }
 
-    return location;
+    return path.resolve('schema.zmodel');
 }
diff --git a/packages/schema/src/plugins/prisma/schema-generator.ts b/packages/schema/src/plugins/prisma/schema-generator.ts
index 508e379f3..1d59f7429 100644
--- a/packages/schema/src/plugins/prisma/schema-generator.ts
+++ b/packages/schema/src/plugins/prisma/schema-generator.ts
@@ -48,7 +48,7 @@ import { name } from '.';
 import { getStringLiteral } from '../../language-server/validator/utils';
 import telemetry from '../../telemetry';
 import { execSync } from '../../utils/exec-utils';
-import { getPackageJson } from '../../utils/pkg-utils';
+import { findPackageJson } from '../../utils/pkg-utils';
 import {
     ModelFieldType,
     AttributeArg as PrismaAttributeArg,
@@ -441,15 +441,19 @@ export default class PrismaSchemaGenerator {
 }
 
 export function getDefaultPrismaOutputFile(schemaPath: string) {
-    let result: string | undefined;
-
     // handle override from package.json
-    const pkgJson = getPackageJson();
-    if (typeof pkgJson.zenstack?.prisma === 'string') {
-        result = path.resolve(pkgJson.zenstack.prisma);
-    } else {
-        result = './prisma/schema.prisma';
+    const pkgJsonPath = findPackageJson(path.dirname(schemaPath));
+    if (pkgJsonPath) {
+        const pkgJson = JSON.parse(fs.readFileSync(pkgJsonPath, 'utf-8'));
+        if (typeof pkgJson?.zenstack?.prisma === 'string') {
+            if (path.isAbsolute(pkgJson.zenstack.prisma)) {
+                return pkgJson.zenstack.prisma;
+            } else {
+                // resolve relative to package.json
+                return path.resolve(path.dirname(pkgJsonPath), pkgJson.zenstack.prisma);
+            }
+        }
     }
 
-    return resolvePath(result, { schemaPath });
+    return resolvePath('./prisma/schema.prisma', { schemaPath });
 }
diff --git a/packages/schema/src/utils/pkg-utils.ts b/packages/schema/src/utils/pkg-utils.ts
index ffb9b0aea..ca4ca127d 100644
--- a/packages/schema/src/utils/pkg-utils.ts
+++ b/packages/schema/src/utils/pkg-utils.ts
@@ -85,9 +85,25 @@ export function ensurePackage(
     }
 }
 
-export function getPackageJson() {
-    const pkgJsonPath = path.join(process.cwd(), 'package.json');
-    if (fs.existsSync(pkgJsonPath)) {
+export function findPackageJson(searchPath?: string) {
+    let currDir = searchPath ?? process.cwd();
+    while (currDir) {
+        const pkgJsonPath = path.join(currDir, 'package.json');
+        if (fs.existsSync(pkgJsonPath)) {
+            return pkgJsonPath;
+        }
+        const up = path.resolve(currDir, '..');
+        if (up === currDir) {
+            return undefined;
+        }
+        currDir = up;
+    }
+    return undefined;
+}
+
+export function getPackageJson(searchPath?: string) {
+    const pkgJsonPath = findPackageJson(searchPath);
+    if (pkgJsonPath) {
         return JSON.parse(fs.readFileSync(pkgJsonPath, 'utf-8'));
     } else {
         return undefined;