diff --git a/src/main/java/io/openliberty/tools/common/plugins/config/ServerConfigDocument.java b/src/main/java/io/openliberty/tools/common/plugins/config/ServerConfigDocument.java
index 2ae4372f3..df3a36bd3 100644
--- a/src/main/java/io/openliberty/tools/common/plugins/config/ServerConfigDocument.java
+++ b/src/main/java/io/openliberty/tools/common/plugins/config/ServerConfigDocument.java
@@ -202,7 +202,7 @@ public ServerConfigDocument(CommonLoggerI log, File originalServerXMLFile, Map<S
         this.originalServerXMLFile = originalServerXMLFile;
     }
 
-    private DocumentBuilder getDocumentBuilder() {
+    private static DocumentBuilder getDocumentBuilder() {
         DocumentBuilder docBuilder;
 
         DocumentBuilderFactory docBuilderFactory = DocumentBuilderFactory.newInstance();
@@ -1005,4 +1005,32 @@ public void setSpringBootAppNodeLocation(Optional<String> springBootAppNodeLocat
         this.springBootAppNodeLocation = springBootAppNodeLocation;
     }
 
+    /**
+     * Parses a loose application XML file and returns a list of all sourceOnDisk
+     * attribute values found on {@code <file>} and {@code <dir>} elements.
+     *
+     * @param looseAppFile - the loose application XML file to parse
+     * @return a List of sourceOnDisk path strings; empty if none are found or the file cannot be parsed
+     * @throws FileNotFoundException if the file does not exist
+     * @throws IOException if the file cannot be read
+     */
+    public static Set<String> getSourceOnDiskPaths(File looseAppFile) throws FileNotFoundException, IOException {
+        Set<String> result = new HashSet<String>();
+        Document doc;
+        try (FileInputStream is = new FileInputStream(looseAppFile)) {
+            doc = getDocumentBuilder().parse(is);
+        } catch (SAXException e) {
+            return result; // not valid XML
+        }
+        for (String tag : new String[]{"file", "dir"}) {
+            NodeList nodes = doc.getElementsByTagName(tag);
+            for (int i = 0; i < nodes.getLength(); i++) {
+                org.w3c.dom.Node attr = nodes.item(i).getAttributes().getNamedItem("sourceOnDisk");
+                if (attr != null && !attr.getNodeValue().isEmpty()) {
+                    result.add(attr.getNodeValue());
+                }
+            }
+        }
+        return result;
+    }
 }
\ No newline at end of file
diff --git a/src/main/java/io/openliberty/tools/common/plugins/util/DevUtil.java b/src/main/java/io/openliberty/tools/common/plugins/util/DevUtil.java
index a9e8b2b6c..96860eb91 100644
--- a/src/main/java/io/openliberty/tools/common/plugins/util/DevUtil.java
+++ b/src/main/java/io/openliberty/tools/common/plugins/util/DevUtil.java
@@ -5878,7 +5878,7 @@ protected void triggerMainModuleCompile(boolean testsOnly) throws IOException {
 
     /**
      * Trigger a compile of the entire specified module. This is only used in a
-     * multi-module scenario. Adds all Java files to the to be compiled list so that
+     * multi-module scenario. Adds all Java files to the to-be-compiled list so that
      * they will be compiled on next watch loop.
      * 
      * @param project   ProjectModule, the module to be compiled
diff --git a/src/main/java/io/openliberty/tools/common/plugins/util/FeatureGeneratorUtil.java b/src/main/java/io/openliberty/tools/common/plugins/util/FeatureGeneratorUtil.java
index c6d031ec2..37540dead 100644
--- a/src/main/java/io/openliberty/tools/common/plugins/util/FeatureGeneratorUtil.java
+++ b/src/main/java/io/openliberty/tools/common/plugins/util/FeatureGeneratorUtil.java
@@ -16,6 +16,7 @@
 package io.openliberty.tools.common.plugins.util;
 
 import java.io.File;
+import java.io.IOException;
 import java.lang.reflect.InvocationTargetException;
 import java.lang.reflect.Method;
 import java.net.MalformedURLException;
@@ -26,6 +27,8 @@
 import java.util.Map;
 import java.util.Set;
 
+import io.openliberty.tools.common.plugins.config.ServerConfigDocument;
+
 public abstract class FeatureGeneratorUtil {
 
     public static final String FEATURE_GEN_MAVEN_GROUP_ID = "com.ibm.websphere.appmod.tools";
@@ -135,6 +138,7 @@ public FeatureGeneratorUtil(File featureGen) {
      * @param currentFeatureSet - the features already specified in the server configuration
      * @param classFiles - a set of class files for the generator to handle. Should be a subset of allClassesDirectories
      * @param allClassesDirectories - the directories containing all the class files of the application
+     * @param deployedAppFilePath - the absolute path to the xml config of the loose application
      * @param logLocation - directory name relative to project or absolute path passed to feature generator
      * @param targetJavaEE - generate features valid for the indicated version of EE
      * @param targetMicroProfile - generate features valid for the indicated version of MicroProfile
@@ -154,10 +158,11 @@ public FeatureGeneratorUtil(File featureGen) {
      * @throws IllegalTargetComboException - indicates the MP or EE version parameters are not supported by the feature
      *                                       generator when used in combination with each other. E.g. EE 7 and MP 2.1
      */
-    public Set<String> runFeatureGenerator(Set<String> currentFeatureSet, List<String> classFiles, Set<String> allClassesDirectories,
+    public Set<String> runFeatureGenerator(Set<String> currentFeatureSet, List<String> classFiles, String deployedAppFilePath,
             String logLocation, String targetJavaEE, String targetMicroProfile, Map featureListFileMap, boolean optimize)
             throws PluginExecutionException, NoRecommendationException, RecommendationSetException, FeatureModifiedException,
-            FeatureUnavailableException, IllegalTargetException, IllegalTargetComboException, VersionlessFeatureDetectedException {
+            FeatureUnavailableException, IllegalTargetException, IllegalTargetComboException, VersionlessFeatureDetectedException,
+            IOErrorReadingXMLException {
         Set<String> generatedFeatureList = null;
         if (featureGenJar != null && featureGenJar.exists()) {
             // if we are already generating features for all class files (optimize=true) and
@@ -166,8 +171,8 @@ public Set<String> runFeatureGenerator(Set<String> currentFeatureSet, List<Strin
             boolean reRunIfFailed = !currentFeatureSet.isEmpty() || !optimize;
             try {
                 Method generateFeatureSetMethod = getGeneratorMethod();
-                // names: binaryInputs, targetJavaEE, targetMicroProfile, currentFeatures, logLocation, logLevel, locale
-                Set<String> binaryInputs = getBinaryInputs(classFiles, allClassesDirectories, optimize);
+                Set<String> binaryInputs = getBinaryInputs(classFiles, deployedAppFilePath, optimize);
+
                 String logLevel;
                 if (isDebugEnabled()) {
                     logLevel = "*=FINE";  // generate messages for debugging by support team
@@ -184,6 +189,7 @@ public Set<String> runFeatureGenerator(Set<String> currentFeatureSet, List<Strin
                         "  logLocation: " + logLocation + "\n" +
                         "  logLevel: " + logLevel + "\n" +
                         "  locale: " + java.util.Locale.getDefault());
+                // argument names: binaryInputs, targetJavaEE, targetMicroProfile, currentFeatures, featureListFileMap??, logLocation, logLevel, locale
                 generatedFeatureList = (Set<String>) generateFeatureSetMethod.invoke(null, binaryInputs, targetJavaEE, targetMicroProfile,
                         currentFeatureSet, featureListFileMap, logLocation, logLevel, java.util.Locale.getDefault());
                 for (String s : generatedFeatureList) {debug(s);};
@@ -206,7 +212,7 @@ public Set<String> runFeatureGenerator(Set<String> currentFeatureSet, List<Strin
                     // The list of features from the app is passed in but it contains conflicts
                     Set<String> conflicts = getFeatures(generatorException);
                     // always rerun feature generator in this scenario, this exception only occurs if a current feature list is passed to feature generator
-                    Set<String> sampleFeatureList = reRunFeatureGenerator(allClassesDirectories, logLocation, targetJavaEE, targetMicroProfile, featureListFileMap);
+                    Set<String> sampleFeatureList = reRunFeatureGenerator(deployedAppFilePath, logLocation, targetJavaEE, targetMicroProfile, featureListFileMap);
                     if (sampleFeatureList == null) {
                         throw new NoRecommendationException(conflicts);
                     } else {
@@ -216,7 +222,7 @@ public Set<String> runFeatureGenerator(Set<String> currentFeatureSet, List<Strin
                     // The scanned files conflict with each other or with current features
                     Set<String> conflicts = getFeatures(generatorException);
                     //  rerun feature generator with all class files and without the current feature set to get feature recommendations
-                    Set<String> sampleFeatureList = reRunIfFailed ? reRunFeatureGenerator(allClassesDirectories, logLocation, targetJavaEE, targetMicroProfile, featureListFileMap): null;
+                    Set<String> sampleFeatureList = reRunIfFailed ? reRunFeatureGenerator(deployedAppFilePath, logLocation, targetJavaEE, targetMicroProfile, featureListFileMap): null;
                     if (sampleFeatureList == null) {
                         throw new NoRecommendationException(conflicts);
                     } else {
@@ -226,7 +232,7 @@ public Set<String> runFeatureGenerator(Set<String> currentFeatureSet, List<Strin
                     // The scanned files conflict and the generator suggests modifying some features
                     Set<String> modifications = getFeatures(generatorException);
                     //  rerun feature generator with all class files and without the current feature set
-                    Set<String> sampleFeatureList = reRunIfFailed ? reRunFeatureGenerator(allClassesDirectories, logLocation, targetJavaEE, targetMicroProfile, featureListFileMap) : null;
+                    Set<String> sampleFeatureList = reRunIfFailed ? reRunFeatureGenerator(deployedAppFilePath, logLocation, targetJavaEE, targetMicroProfile, featureListFileMap) : null;
                     throw new FeatureModifiedException(modifications, 
                             (sampleFeatureList == null) ? getNoSampleFeatureList() : sampleFeatureList, generatorException.getLocalizedMessage());
                 } else if (generatorException.getClass().getName().equals(FEATURE_NOT_AVAILABLE_EXCEPTION)) {
@@ -286,19 +292,19 @@ public Set<String> runFeatureGenerator(Set<String> currentFeatureSet, List<Strin
      * In order to generate the optimal list we must scan all classes in the application and we do not consider
      * the features already specified in the server configuration (server.xml).
      * 
-     * @param allClassesDirectories - the generator will find all the class files in this set of directories
+     * @param deployedAppFilePath - the generator will find all the class files in this file
      * @param logLocation - directory name relative to project or absolute path passed to feature generator
      * @param targetJavaEE - generate features valid for the indicated version of EE
      * @param targetMicroProfile - generate features valid for the indicated version of MicroProfile
      * @return - a set of features that will allow the application to run in a Liberty server
      * @throws PluginExecutionException - any exception that prevents the generator from running
      */
-    public Set<String> reRunFeatureGenerator(Set<String> allClassesDirectories, String logLocation, String targetJavaEE, String targetMicroProfile,
-            Map featureListFileMap) throws PluginExecutionException {
+    public Set<String> reRunFeatureGenerator(String deployedAppFilePath, String logLocation, String targetJavaEE, String targetMicroProfile,
+            Map featureListFileMap) throws PluginExecutionException, IOErrorReadingXMLException {
         Set<String> generatedFeatureList = null;
         try {
             Method generateFeatureSetMethod = getGeneratorMethod();
-            Set<String> binaryInputs = allClassesDirectories;
+            Set<String> binaryInputs = getBinaryInputs(null, deployedAppFilePath, true);
             Set<String> currentFeaturesSet = new HashSet<String>(); // when re-running always pass in no features
             String logLevel;
             if (isDebugEnabled()) {
@@ -384,18 +390,30 @@ private Method getGeneratorMethod() throws MalformedURLException, ClassNotFoundE
         return featureGenMethod;
     }
 
-    private static Set<String> getBinaryInputs(List<String> classFiles, Set<String> classDirectories, boolean optimize) throws PluginExecutionException {
-        Set<String> resultSet;
+    // Required is either some type of app file or some class files. This is checked by the caller to runFeatureGenerator()
+    private Set<String> getBinaryInputs(List<String> classFiles, String deployedAppFilePath, boolean optimize) throws IOErrorReadingXMLException {
+        Set<String> resultSet = new HashSet<String>();
         if (optimize) {
-            if (classDirectories == null || classDirectories.isEmpty()) {
-                return new HashSet<String>();
+            // Use either the loose app config or a regular application deployment binary file (ear/war/jar)
+            if (deployedAppFilePath != null) {
+                if (deployedAppFilePath.endsWith(".xml")) {
+                    try {
+                        // extract the file names from the xml file
+                        File looseAppFile = new File(deployedAppFilePath);
+                        if (looseAppFile.exists()) {
+                            resultSet = ServerConfigDocument.getSourceOnDiskPaths(looseAppFile);
+                        }
+                    } catch (IOException e) {
+                        throw new IOErrorReadingXMLException();
+                    }
+                } else {
+                    resultSet.add(deployedAppFilePath);
+                }
             }
-            resultSet = classDirectories;
         } else {
+            // incremental generate features passes only individual class files to the scanner
             if (classFiles != null && !classFiles.isEmpty()) {
                 resultSet = new HashSet<String>(classFiles);
-            } else {
-                return new HashSet<String>();
             }
         }
         return resultSet;
@@ -640,4 +658,8 @@ public class IllegalTargetComboException extends AbstractIllegalTargetException
     public class VersionlessFeatureDetectedException extends Exception {
         private static final long serialVersionUID = 1L;
     }
+
+    public class IOErrorReadingXMLException extends Exception {
+        private static final long serialVersionUID = 1L;
+    }
 }