diff --git a/packages/scripts/__tests__/config/WebpackConfigHelper.spec.ts b/packages/scripts/__tests__/config/WebpackConfigHelper.spec.ts
index 74b3d8c74..dd7e011a4 100644
--- a/packages/scripts/__tests__/config/WebpackConfigHelper.spec.ts
+++ b/packages/scripts/__tests__/config/WebpackConfigHelper.spec.ts
@@ -232,6 +232,88 @@ describe('WebpackConfigHelper', () => {
 				}
 			});
 
+			test('does not set babel-loader for node_modules in dev mode per config', () => {
+				const newProjectConfig = { ...projectConfig };
+				newProjectConfig.compileNodeModules = {
+					dev: false,
+					prod: true,
+				};
+				const cwc = new WebpackConfigHelper(
+					newProjectConfig.files[0],
+					getConfigFromProjectAndServer(newProjectConfig, serverConfig),
+					'/foo/bar',
+					true
+				);
+				const modules = cwc.getModule();
+				if (Array.isArray(modules.rules)) {
+					const nmJsRules = findWpackIoBabelOnNm(modules);
+					expect(nmJsRules).toHaveLength(0);
+				} else {
+					throw new Error('Module is not an array');
+				}
+			});
+			test('does set babel-loader for node_modules in dev mode per config', () => {
+				const newProjectConfig = { ...projectConfig };
+				newProjectConfig.compileNodeModules = {
+					dev: true,
+					prod: false,
+				};
+				const cwc = new WebpackConfigHelper(
+					newProjectConfig.files[0],
+					getConfigFromProjectAndServer(newProjectConfig, serverConfig),
+					'/foo/bar',
+					true
+				);
+				const modules = cwc.getModule();
+				if (Array.isArray(modules.rules)) {
+					const nmJsRules = findWpackIoBabelOnNm(modules);
+					expect(nmJsRules).toHaveLength(1);
+				} else {
+					throw new Error('Module is not an array');
+				}
+			});
+
+			test('does not set babel-loader for node_modules in prod mode per config', () => {
+				const newProjectConfig = { ...projectConfig };
+				newProjectConfig.compileNodeModules = {
+					dev: true,
+					prod: false,
+				};
+				const cwc = new WebpackConfigHelper(
+					newProjectConfig.files[0],
+					getConfigFromProjectAndServer(newProjectConfig, serverConfig),
+					'/foo/bar',
+					false
+				);
+				const modules = cwc.getModule();
+				if (Array.isArray(modules.rules)) {
+					const nmJsRules = findWpackIoBabelOnNm(modules);
+					expect(nmJsRules).toHaveLength(0);
+				} else {
+					throw new Error('Module is not an array');
+				}
+			});
+			test('does set babel-loader for node_modules in prod mode per config', () => {
+				const newProjectConfig = { ...projectConfig };
+				newProjectConfig.compileNodeModules = {
+					dev: false,
+					prod: true,
+				};
+				const cwc = new WebpackConfigHelper(
+					newProjectConfig.files[0],
+					getConfigFromProjectAndServer(newProjectConfig, serverConfig),
+					'/foo/bar',
+					false
+				);
+				const modules = cwc.getModule();
+				if (Array.isArray(modules.rules)) {
+					const nmJsRules = findWpackIoBabelOnNm(modules);
+					expect(nmJsRules).toHaveLength(1);
+				} else {
+					throw new Error('Module is not an array');
+				}
+			});
+
 			test('obeys hasFlow & hasRect', () => {
 				const cwc = new WebpackConfigHelper(
 					projectConfig.files[0],
diff --git a/packages/scripts/__tests__/helpers/testUtils.ts b/packages/scripts/__tests__/helpers/testUtils.ts
index 2529f0ac2..1be62477f 100644
--- a/packages/scripts/__tests__/helpers/testUtils.ts
+++ b/packages/scripts/__tests__/helpers/testUtils.ts
@@ -45,6 +45,10 @@ export function getConfigFromProjectAndServer(
 	pCfg: ProjectConfig,
 	sCfg: ServerConfig
 ): WebpackConfigHelperConfig {
+	const compileNodeModules = pCfg.compileNodeModules ?? {
+		dev: true,
+		prod: true,
+	};
 	return {
 		appName: pCfg.appName,
 		type: pCfg.type,
@@ -66,8 +70,8 @@ export function getConfigFromProjectAndServer(
 		externals: pCfg.externals,
 		useBabelConfig: false,
 		compileNodeModules: {
-			dev: true,
-			prod: true,
+			dev: compileNodeModules.dev ?? true,
+			prod: compileNodeModules.prod ?? true,
 		},
 		useReactJsxRuntime: true,
 	};