diff --git a/extensions/sql-database-projects/src/models/project.ts b/extensions/sql-database-projects/src/models/project.ts
index 5aca304079..4f2d4fb518 100644
--- a/extensions/sql-database-projects/src/models/project.ts
+++ b/extensions/sql-database-projects/src/models/project.ts
@@ -644,7 +644,7 @@ export class Project {
 			referenceNode.appendChild(databaseSqlCmdVariableElement);
 
 			// add SQLCMD variable
-			this.addSqlCmdVariable((<DacpacReferenceProjectEntry>entry).databaseSqlCmdVariable!, (<DacpacReferenceProjectEntry>entry).databaseName);
+			this.addSqlCmdVariable((<DacpacReferenceProjectEntry>entry).databaseSqlCmdVariable!, (<DacpacReferenceProjectEntry>entry).databaseVariableLiteralValue!);
 		} else if (entry.databaseVariableLiteralValue) {
 			const databaseVariableLiteralValueElement = this.projFileXmlDoc.createElement(constants.DatabaseVariableLiteralValue);
 			const databaseTextNode = this.projFileXmlDoc.createTextNode(entry.databaseVariableLiteralValue);
diff --git a/extensions/sql-database-projects/src/test/project.test.ts b/extensions/sql-database-projects/src/test/project.test.ts
index adbd9e5745..9124980fae 100644
--- a/extensions/sql-database-projects/src/test/project.test.ts
+++ b/extensions/sql-database-projects/src/test/project.test.ts
@@ -246,6 +246,7 @@ describe('Project: sqlproj content operations', function (): void {
 		should(projFileText).containEql('test2.dacpac');
 		should(projFileText).containEql('<DatabaseSqlCmdVariable>test2Db</DatabaseSqlCmdVariable>');
 		should(projFileText).containEql('<SqlCmdVariable Include="test2Db">');
+		should(projFileText).containEql('<DefaultValue>test2DbName</DefaultValue>');
 	});
 
 	it('Should add a dacpac reference to a different database in a different server correctly', async function (): Promise<void> {
@@ -270,8 +271,10 @@ describe('Project: sqlproj content operations', function (): void {
 		should(projFileText).containEql('test3.dacpac');
 		should(projFileText).containEql('<DatabaseSqlCmdVariable>test3Db</DatabaseSqlCmdVariable>');
 		should(projFileText).containEql('<SqlCmdVariable Include="test3Db">');
+		should(projFileText).containEql('<DefaultValue>test3DbName</DefaultValue>');
 		should(projFileText).containEql('<ServerSqlCmdVariable>otherServer</ServerSqlCmdVariable>');
 		should(projFileText).containEql('<SqlCmdVariable Include="otherServer">');
+		should(projFileText).containEql('<DefaultValue>otherServerName</DefaultValue>');
 	});
 
 	it('Should add a project reference to the same database correctly', async function (): Promise<void> {
@@ -322,6 +325,7 @@ describe('Project: sqlproj content operations', function (): void {
 		should(projFileText).containEql('project1');
 		should(projFileText).containEql('<DatabaseSqlCmdVariable>testdb</DatabaseSqlCmdVariable>');
 		should(projFileText).containEql('<SqlCmdVariable Include="testdb">');
+		should(projFileText).containEql('<DefaultValue>testdbName</DefaultValue>');
 	});
 
 	it('Should add a project reference to a different database in a different server correctly', async function (): Promise<void> {
@@ -351,8 +355,10 @@ describe('Project: sqlproj content operations', function (): void {
 		should(projFileText).containEql('project1');
 		should(projFileText).containEql('<DatabaseSqlCmdVariable>testdb</DatabaseSqlCmdVariable>');
 		should(projFileText).containEql('<SqlCmdVariable Include="testdb">');
+		should(projFileText).containEql('<DefaultValue>testdbName</DefaultValue>');
 		should(projFileText).containEql('<ServerSqlCmdVariable>otherServer</ServerSqlCmdVariable>');
 		should(projFileText).containEql('<SqlCmdVariable Include="otherServer">');
+		should(projFileText).containEql('<DefaultValue>otherServerName</DefaultValue>');
 	});
 
 	it('Should not allow adding duplicate database references', async function (): Promise<void> {
@@ -377,6 +383,57 @@ describe('Project: sqlproj content operations', function (): void {
 		should(project.databaseReferences.length).equal(2, 'There should be two database references after trying to add a reference to test.dacpac again');
 	});
 
+	it('Should update sqlcmd variable values if value changes', async function (): Promise<void> {
+		projFilePath = await testUtils.createTestSqlProjFile(baselines.newProjectFileBaseline);
+		const project = await Project.openProject(projFilePath);
+		const databaseVariable = 'test3Db';
+		const serverVariable = 'otherServer';
+
+		should(project.databaseReferences.length).equal(0, 'There should be no database references to start with');
+		await project.addDatabaseReference({
+			dacpacFileLocation: Uri.file('test3.dacpac'),
+			databaseName: 'test3DbName',
+			databaseVariable: databaseVariable,
+			serverName: 'otherServerName',
+			serverVariable: serverVariable,
+			suppressMissingDependenciesErrors: false
+		});
+		should(project.databaseReferences.length).equal(1, 'There should be a database reference after adding a reference to test3');
+		should(project.databaseReferences[0].databaseName).equal('test3', 'The database reference should be test3');
+		should(Object.keys(project.sqlCmdVariables).length).equal(2, 'There should be 2 sqlcmdvars after adding the dacpac reference');
+
+		// make sure reference to test3.dacpac and SQLCMD variables were added
+		let projFileText = (await fs.readFile(projFilePath)).toString();
+		should(projFileText).containEql('<SqlCmdVariable Include="test3Db">');
+		should(projFileText).containEql('<DefaultValue>test3DbName</DefaultValue>');
+		should(projFileText).containEql('<SqlCmdVariable Include="otherServer">');
+		should(projFileText).containEql('<DefaultValue>otherServerName</DefaultValue>');
+
+		// delete reference
+		await project.deleteDatabaseReference(project.databaseReferences[0]);
+		should(project.databaseReferences.length).equal(0, 'There should be no database references after deleting');
+		should(Object.keys(project.sqlCmdVariables).length).equal(2, 'There should still be 2 sqlcmdvars after deleting the dacpac reference');
+
+		// add reference to the same dacpac again but with different values for the sqlcmd variables
+		await project.addDatabaseReference({
+			dacpacFileLocation: Uri.file('test3.dacpac'),
+			databaseName: 'newDbName',
+			databaseVariable: databaseVariable,
+			serverName: 'newServerName',
+			serverVariable: serverVariable,
+			suppressMissingDependenciesErrors: false
+		});
+		should(project.databaseReferences.length).equal(1, 'There should be a database reference after adding a reference to test3');
+		should(project.databaseReferences[0].databaseName).equal('test3', 'The database reference should be test3');
+		should(Object.keys(project.sqlCmdVariables).length).equal(2, 'There should still be 2 sqlcmdvars after adding the dacpac reference again with different sqlcmdvar values');
+
+		projFileText = (await fs.readFile(projFilePath)).toString();
+		should(projFileText).containEql('<SqlCmdVariable Include="test3Db">');
+		should(projFileText).containEql('<DefaultValue>newDbName</DefaultValue>');
+		should(projFileText).containEql('<SqlCmdVariable Include="otherServer">');
+		should(projFileText).containEql('<DefaultValue>newServerName</DefaultValue>');
+	});
+
 	it('Should add pre and post deployment scripts as entries to sqlproj', async function (): Promise<void> {
 		projFilePath = await testUtils.createTestSqlProjFile(baselines.newProjectFileBaseline);
 		const project: Project = await Project.openProject(projFilePath);