diff --git a/docs/cli-reference.md b/docs/cli-reference.md
index ce9a3120..a82ad48a 100644
--- a/docs/cli-reference.md
+++ b/docs/cli-reference.md
@@ -724,7 +724,7 @@ Use the `exclude` field to skip directories during compilation. This improves pe
 - `coverage/**` - Matches "coverage" and all subdirectories
 - `projects/**/apm/**` - Complex nested matching with `**`
 
-**Default exclusions** (always applied):
+**Default exclusions** (always applied, matched on exact path components):
 - `node_modules`, `__pycache__`, `.git`, `dist`, `build`, `apm_modules`
 - Hidden directories (starting with `.`)
 
diff --git a/docs/compilation.md b/docs/compilation.md
index 49dbc9a5..df3edec4 100644
--- a/docs/compilation.md
+++ b/docs/compilation.md
@@ -290,7 +290,7 @@ Use the `exclude` field to skip directories during compilation, improving perfor
 - Prevent duplicate instruction discovery
 
 **Default Exclusions:**
-APM always excludes these directories (no configuration needed):
+APM always excludes directories whose path contains an exact component matching one of these names (no configuration needed). A directory named `rebuild/` is **not** excluded just because it contains `build` as a substring.
 - `node_modules`
 - `__pycache__`
 - `.git`
diff --git a/src/apm_cli/compilation/context_optimizer.py b/src/apm_cli/compilation/context_optimizer.py
index 07e85f5f..0910cc25 100644
--- a/src/apm_cli/compilation/context_optimizer.py
+++ b/src/apm_cli/compilation/context_optimizer.py
@@ -429,8 +429,8 @@ def _analyze_project_structure(self) -> None:
             if any(part.startswith('.') for part in current_path.parts[len(self.base_dir.parts):]):
                 continue
             
-            # Default hardcoded exclusions for backwards compatibility
-            if any(ignore in str(current_path) for ignore in DEFAULT_EXCLUDED_DIRNAMES):
+            # Default hardcoded exclusions — match on exact path components
+            if any(part in DEFAULT_EXCLUDED_DIRNAMES for part in relative_path.parts):
                 continue
             
             # Apply configurable exclusion patterns
diff --git a/tests/unit/compilation/test_context_optimizer.py b/tests/unit/compilation/test_context_optimizer.py
index 10da05cb..e7c637b9 100644
--- a/tests/unit/compilation/test_context_optimizer.py
+++ b/tests/unit/compilation/test_context_optimizer.py
@@ -677,6 +677,60 @@ def test_default_exclusions_still_work(self):
             assert base_path / "custom_exclude" not in cached_dirs  # Custom exclusion
 
 
+class TestSubstringExclusionFalsePositives:
+    """Test that directory exclusions use component matching, not substring matching (Fixes #158)."""
+
+    def test_directory_containing_exclusion_token_not_excluded(self):
+        """Directories like 'rebuild/' must NOT be excluded just because 'build' is a substring."""
+        with tempfile.TemporaryDirectory() as tmpdir:
+            base = Path(tmpdir).resolve()
+            for name in ["rebuild", "apm_modules_guide", "redistribution", "node_modules_compat"]:
+                d = base / "src" / name
+                d.mkdir(parents=True, exist_ok=True)
+                (d / "file.py").touch()
+
+            optimizer = ContextOptimizer(base_dir=str(base))
+            optimizer._analyze_project_structure()
+
+            cached = set(optimizer._directory_cache.keys())
+            for name in ["rebuild", "apm_modules_guide", "redistribution", "node_modules_compat"]:
+                assert base / "src" / name in cached, f"'{name}' was incorrectly excluded"
+
+    def test_exact_exclusion_names_still_excluded(self):
+        """Directories exactly named 'build', 'dist', etc. must still be excluded."""
+        with tempfile.TemporaryDirectory() as tmpdir:
+            base = Path(tmpdir).resolve()
+            for name in ["build", "dist", "node_modules", "__pycache__"]:
+                d = base / name
+                d.mkdir(parents=True, exist_ok=True)
+                (d / "file.py").touch()
+            (base / "src").mkdir(exist_ok=True)
+            (base / "src" / "app.py").touch()
+
+            optimizer = ContextOptimizer(base_dir=str(base))
+            optimizer._analyze_project_structure()
+
+            cached = set(optimizer._directory_cache.keys())
+            assert base / "src" in cached
+            for name in ["build", "dist", "node_modules", "__pycache__"]:
+                assert base / name not in cached, f"'{name}' should be excluded"
+
+    def test_nested_exclusion_name_still_excluded(self):
+        """A directory named 'build' nested under a non-excluded parent must still be excluded."""
+        with tempfile.TemporaryDirectory() as tmpdir:
+            base = Path(tmpdir).resolve()
+            (base / "src" / "build").mkdir(parents=True)
+            (base / "src" / "build" / "output.js").touch()
+            (base / "src" / "app.py").touch()
+
+            optimizer = ContextOptimizer(base_dir=str(base))
+            optimizer._analyze_project_structure()
+
+            cached = set(optimizer._directory_cache.keys())
+            assert base / "src" in cached
+            assert base / "src" / "build" not in cached
+
+
 class TestExpandGlobPattern:
     """Test _expand_glob_pattern brace expansion."""