diff --git a/crates/pop-contracts/src/build.rs b/crates/pop-contracts/src/build.rs
index 6b1c2744..ead63d69 100644
--- a/crates/pop-contracts/src/build.rs
+++ b/crates/pop-contracts/src/build.rs
@@ -1,13 +1,15 @@
 // SPDX-License-Identifier: GPL-3.0
 
+use crate::{errors::Error, utils::helpers::get_manifest_path};
 use contract_build::{execute, BuildMode, ExecuteArgs};
-use std::path::PathBuf;
-
-use crate::utils::helpers::get_manifest_path;
+use std::{env, path::PathBuf};
 
 /// Build the smart contract located at the specified `path` in `build_release` mode.
-pub fn build_smart_contract(path: &Option<PathBuf>, build_release: bool) -> anyhow::Result<String> {
-	let manifest_path = get_manifest_path(path)?;
+pub fn build_smart_contract(path: &Option<PathBuf>, build_release: bool) -> Result<String, Error> {
+	let manifest_path = get_manifest_path(&path)?;
+	// Set the CARGO_TARGET_DIR variable to this project target
+	let target_path = manifest_path.absolute_directory()?.join("target");
+	env::set_var("CARGO_TARGET_DIR", target_path.display().to_string());
 
 	let build_mode = match build_release {
 		true => BuildMode::Release,
@@ -17,8 +19,37 @@ pub fn build_smart_contract(path: &Option<PathBuf>, build_release: bool) -> anyh
 	let args = ExecuteArgs { manifest_path, build_mode, ..Default::default() };
 
 	// Execute the build and log the output of the build
-	let result = execute(args)?;
+	let result =
+		execute(args).map_err(|error| Error::BuildContractError(format!("{:?}", error)))?;
 	let formatted_result = result.display();
 
 	Ok(formatted_result)
 }
+
+#[cfg(test)]
+mod tests {
+	use super::*;
+	use anyhow::Result;
+	use duct::cmd;
+	use tempfile::tempdir;
+
+	#[test]
+	fn build_parachain_fails_no_ink_project() -> Result<()> {
+		let temp_dir = tempdir()?;
+		let name = "my_contract";
+		cmd("cargo", ["new", name, "--bin"]).dir(temp_dir.path()).run()?;
+		assert!(matches!(
+			build_smart_contract(&Some(PathBuf::from(temp_dir.path().join(name))), false),
+			Err(Error::BuildContractError(..))
+		));
+		// Assert env variable has been set
+		assert_eq!(
+			env::var("CARGO_TARGET_DIR")?,
+			format!(
+				"/private{}", // manifest_path.absolute_directory() adds a /private prefix
+				PathBuf::from(temp_dir.path().join("my_contract/target")).display().to_string()
+			)
+		);
+		Ok(())
+	}
+}
diff --git a/crates/pop-contracts/src/errors.rs b/crates/pop-contracts/src/errors.rs
index 6f7201ca..7350cb7f 100644
--- a/crates/pop-contracts/src/errors.rs
+++ b/crates/pop-contracts/src/errors.rs
@@ -57,4 +57,7 @@ pub enum Error {
 
 	#[error("HTTP error: {0}")]
 	HttpError(#[from] reqwest::Error),
+
+	#[error("Failed to build the contract: {0}")]
+	BuildContractError(String),
 }