diff --git a/src/test/cli.build.test.ts b/src/test/cli.build.test.ts
index a6c17f5a9..b1a2a9e32 100644
--- a/src/test/cli.build.test.ts
+++ b/src/test/cli.build.test.ts
@@ -260,11 +260,5 @@ describe('Dev Containers CLI', function () {
 			const details = JSON.parse((await shellExec(`docker inspect test-subfolder-config`)).stdout)[0] as ImageDetails;
 			assert.strictEqual(envListToObj(details.Config.Env).SUBFOLDER_CONFIG_IMAGE_ENV, 'true');
 		});
-
-		it('should build with a local feature', async () => {
-			const res = await shellExec(`${cli} build --workspace-folder ${__dirname}/configs/image-with-local-feature --image-name test-local-feature`)
-			const response = JSON.parse(res.stdout);
-			assert.strictEqual(response.outcome, 'success');
-		});
 	});
 });
\ No newline at end of file
diff --git a/src/test/configs/image-with-local-feature/.devcontainer/devcontainer.json b/src/test/container-features/configs/image-with-local-feature/.devcontainer/devcontainer.json
similarity index 100%
rename from src/test/configs/image-with-local-feature/.devcontainer/devcontainer.json
rename to src/test/container-features/configs/image-with-local-feature/.devcontainer/devcontainer.json
diff --git a/src/test/configs/image-with-local-feature/.devcontainer/test-feature/devcontainer-feature.json b/src/test/container-features/configs/image-with-local-feature/.devcontainer/test-feature/devcontainer-feature.json
similarity index 76%
rename from src/test/configs/image-with-local-feature/.devcontainer/test-feature/devcontainer-feature.json
rename to src/test/container-features/configs/image-with-local-feature/.devcontainer/test-feature/devcontainer-feature.json
index f2da6e155..3a8b63cfd 100644
--- a/src/test/configs/image-with-local-feature/.devcontainer/test-feature/devcontainer-feature.json
+++ b/src/test/container-features/configs/image-with-local-feature/.devcontainer/test-feature/devcontainer-feature.json
@@ -10,5 +10,6 @@
 			"target": "/home/${remoteUser}",
 			"type": "volume"
 		}
-	]
+	],
+	"postCreateCommand": "/usr/bin/whoami && echo ${remoteUser} > /tmp/variable-substitution.testMarker"
 }
\ No newline at end of file
diff --git a/src/test/configs/image-with-local-feature/.devcontainer/test-feature/install.sh b/src/test/container-features/configs/image-with-local-feature/.devcontainer/test-feature/install.sh
similarity index 100%
rename from src/test/configs/image-with-local-feature/.devcontainer/test-feature/install.sh
rename to src/test/container-features/configs/image-with-local-feature/.devcontainer/test-feature/install.sh
diff --git a/src/test/container-features/lifecycleHooks.test.ts b/src/test/container-features/lifecycleHooks.test.ts
index 325d2b900..af3de8664 100644
--- a/src/test/container-features/lifecycleHooks.test.ts
+++ b/src/test/container-features/lifecycleHooks.test.ts
@@ -371,6 +371,38 @@ describe('Feature lifecycle hooks', function () {
 		});
 	});
 
+	describe('lifecycle-hooks-with-variable-substitution', () => {
+		describe('devcontainer up', () => {
+			let containerId: string | null = null;
+			let containerUpStandardError: string;
+			const testFolder = `${__dirname}/configs/image-with-local-feature`;
+
+			before(async () => {
+				await shellExec(`rm -f ${testFolder}/*.testMarker`, undefined, undefined, true);
+				const res = await devContainerUp(cli, testFolder, { 'logLevel': 'trace' });
+				containerId = res.containerId;
+				containerUpStandardError = res.stderr;
+			});
+
+			after(async () => {
+				await devContainerDown({ containerId });
+				await shellExec(`rm -f ${testFolder}/*.testMarker`, undefined, undefined, true);
+			});
+
+			it('executes lifecycle hooks with variable substitution', async () => {
+				const res = await shellExec(`${cli} exec --workspace-folder ${testFolder} cat /tmp/variable-substitution.testMarker`);
+				assert.strictEqual(res.error, null);
+
+				const outputOfExecCommand = res.stdout;
+				console.log(outputOfExecCommand);
+
+				// Executes the command that was installed by the local Feature's 'postCreateCommand'.
+				assert.match(outputOfExecCommand, /vscode/);
+				assert.match(containerUpStandardError, /Running the postCreateCommand from Feature '.\/test-feature/);
+			});
+		});
+	});
+
 	describe('lifecycle-hooks-advanced', () => {
 
 		describe(`devcontainer up`, () => {