diff --git a/understand-anything-plugin/packages/dashboard/src/utils/__tests__/containers.test.ts b/understand-anything-plugin/packages/dashboard/src/utils/__tests__/containers.test.ts
new file mode 100644
index 0000000..49a1e77
--- /dev/null
+++ b/understand-anything-plugin/packages/dashboard/src/utils/__tests__/containers.test.ts
@@ -0,0 +1,89 @@
+import { describe, it, expect } from "vitest";
+import { deriveContainers } from "../containers";
+import type { GraphNode } from "@understand-anything/core/types";
+
+function node(id: string, filePath?: string): GraphNode {
+  return {
+    id,
+    type: "file",
+    name: id,
+    filePath,
+    summary: "",
+    complexity: "simple",
+  } as GraphNode;
+}
+
+describe("deriveContainers — folder strategy", () => {
+  it("groups nodes by first folder segment after LCP", () => {
+    const nodes = [
+      node("a", "src/auth/login.go"),
+      node("b", "src/auth/oauth.go"),
+      node("c", "src/cart/cart.go"),
+      node("d", "src/cart/checkout.go"),
+    ];
+    const { containers, ungrouped } = deriveContainers(nodes, []);
+    expect(ungrouped).toEqual([]);
+    expect(containers).toHaveLength(2);
+    const names = containers.map((c) => c.name).sort();
+    expect(names).toEqual(["auth", "cart"]);
+    const auth = containers.find((c) => c.name === "auth")!;
+    expect(auth.strategy).toBe("folder");
+    expect(auth.nodeIds.sort()).toEqual(["a", "b"]);
+  });
+
+  it("strips deep LCP", () => {
+    const nodes = [
+      node("a", "monorepo/backend/src/auth/login.go"),
+      node("b", "monorepo/backend/src/cart/cart.go"),
+    ];
+    const { containers } = deriveContainers(nodes, []);
+    const names = containers.map((c) => c.name).sort();
+    expect(names).toEqual(["auth", "cart"]);
+  });
+
+  it("collapses nested folders into the first segment", () => {
+    const nodes = [
+      node("a", "auth/handlers/oauth.go"),
+      node("b", "auth/services/token.go"),
+      node("c", "cart/cart.go"),
+    ];
+    const { containers } = deriveContainers(nodes, []);
+    expect(containers.find((c) => c.name === "auth")?.nodeIds.sort()).toEqual(["a", "b"]);
+  });
+
+  it("places nodes without filePath in '~' container", () => {
+    const nodes = [
+      node("a", "auth/login.go"),
+      node("b", "auth/oauth.go"),
+      node("c"),
+      node("d"),
+    ];
+    const { containers } = deriveContainers(nodes, []);
+    expect(containers.find((c) => c.name === "~")?.nodeIds.sort()).toEqual(["c", "d"]);
+  });
+
+  it("suppresses single-child containers (single child becomes ungrouped)", () => {
+    const nodes = [
+      node("a", "auth/login.go"),
+      node("b", "auth/oauth.go"),
+      node("c", "cart/cart.go"),
+    ];
+    const { containers, ungrouped } = deriveContainers(nodes, []);
+    // 'cart' has only 1 child → suppressed
+    expect(containers.find((c) => c.name === "cart")).toBeUndefined();
+    expect(ungrouped).toContain("c");
+    // 'auth' kept
+    expect(containers.find((c) => c.name === "auth")?.nodeIds.sort()).toEqual(["a", "b"]);
+  });
+
+  it("returns flat (no containers) when total nodes < 8", () => {
+    const nodes = [
+      node("a", "auth/x.go"),
+      node("b", "cart/y.go"),
+      node("c", "logs/z.go"),
+    ];
+    const { containers, ungrouped } = deriveContainers(nodes, []);
+    expect(containers).toHaveLength(0);
+    expect(ungrouped.sort()).toEqual(["a", "b", "c"]);
+  });
+});
diff --git a/understand-anything-plugin/packages/dashboard/src/utils/containers.ts b/understand-anything-plugin/packages/dashboard/src/utils/containers.ts
new file mode 100644
index 0000000..fc2a902
--- /dev/null
+++ b/understand-anything-plugin/packages/dashboard/src/utils/containers.ts
@@ -0,0 +1,153 @@
+import type {
+  GraphNode,
+  GraphEdge,
+} from "@understand-anything/core/types";
+import { detectCommunities } from "./louvain";
+
+export interface DerivedContainer {
+  id: string;
+  name: string;
+  nodeIds: string[];
+  strategy: "folder" | "community";
+}
+
+export interface DeriveResult {
+  containers: DerivedContainer[];
+  ungrouped: string[];
+}
+
+const MIN_BUCKET_COUNT = 2;
+const MAX_CONCENTRATION = 0.7;
+const MIN_NODES_FOR_SUPPRESSION = 3;
+const ROOT_BUCKET = "~";
+
+/**
+ * Longest common prefix of the *directory* portion of paths, trimmed to a
+ * `/` boundary. Using dirs (not full paths) avoids consuming the only
+ * folder segment when all paths sit directly under the same folder
+ * (e.g. `[auth/x, auth/y]` → LCP `""`, so we still group on `auth`).
+ */
+function commonPrefix(paths: string[]): string {
+  if (paths.length === 0) return "";
+  const dirs = paths.map((p) => {
+    const slash = p.lastIndexOf("/");
+    return slash >= 0 ? p.slice(0, slash) : "";
+  });
+  let prefix = dirs[0];
+  for (const d of dirs) {
+    while (!d.startsWith(prefix)) {
+      prefix = prefix.slice(0, -1);
+      if (!prefix) return "";
+    }
+  }
+  const lastSlash = prefix.lastIndexOf("/");
+  return lastSlash >= 0 ? prefix.slice(0, lastSlash + 1) : "";
+}
+
+function firstSegment(path: string): string {
+  const slash = path.indexOf("/");
+  return slash >= 0 ? path.slice(0, slash) : path;
+}
+
+function groupByFolder(
+  nodes: GraphNode[],
+): { groups: Map<string, string[]>; rooted: string[] } {
+  const withPath = nodes.filter((n) => n.filePath);
+  const lcp = commonPrefix(withPath.map((n) => n.filePath!));
+  const groups = new Map<string, string[]>();
+  const rooted: string[] = [];
+  for (const n of withPath) {
+    const stripped = n.filePath!.slice(lcp.length);
+    if (!stripped.includes("/")) {
+      rooted.push(n.id);
+      continue;
+    }
+    const seg = firstSegment(stripped);
+    const arr = groups.get(seg) ?? [];
+    arr.push(n.id);
+    groups.set(seg, arr);
+  }
+  for (const n of nodes) {
+    if (!n.filePath) rooted.push(n.id);
+  }
+  return { groups, rooted };
+}
+
+function shouldFallbackToCommunity(
+  groups: Map<string, string[]>,
+  rooted: string[],
+  totalNodes: number,
+): boolean {
+  const bucketCount = groups.size + (rooted.length > 0 ? 1 : 0);
+  if (bucketCount < MIN_BUCKET_COUNT) return true;
+  for (const ids of groups.values()) {
+    if (ids.length / totalNodes > MAX_CONCENTRATION) return true;
+  }
+  if (rooted.length / totalNodes > MAX_CONCENTRATION) return true;
+  return false;
+}
+
+export function deriveContainers(
+  nodes: GraphNode[],
+  edges: GraphEdge[],
+): DeriveResult {
+  if (nodes.length === 0) {
+    return { containers: [], ungrouped: [] };
+  }
+
+  const { groups, rooted } = groupByFolder(nodes);
+
+  const useCommunity = shouldFallbackToCommunity(groups, rooted, nodes.length);
+  let containers: DerivedContainer[];
+
+  if (useCommunity) {
+    const communities = detectCommunities(
+      nodes.map((n) => n.id),
+      edges,
+    );
+    const byCommunity = new Map<number, string[]>();
+    for (const [nodeId, cid] of communities) {
+      const arr = byCommunity.get(cid) ?? [];
+      arr.push(nodeId);
+      byCommunity.set(cid, arr);
+    }
+    const sorted = [...byCommunity.entries()].sort((a, b) => a[0] - b[0]);
+    containers = sorted.map(([cid, ids], i) => ({
+      id: `container:cluster-${cid}`,
+      name: `Cluster ${String.fromCharCode(65 + i)}`,
+      nodeIds: ids,
+      strategy: "community" as const,
+    }));
+  } else {
+    containers = [...groups.entries()].map(([seg, ids]) => ({
+      id: `container:${seg}`,
+      name: seg,
+      nodeIds: ids,
+      strategy: "folder" as const,
+    }));
+    if (rooted.length > 0) {
+      containers.push({
+        id: `container:${ROOT_BUCKET}`,
+        name: ROOT_BUCKET,
+        nodeIds: rooted,
+        strategy: "folder" as const,
+      });
+    }
+  }
+
+  // Suppress single-child containers (their child becomes ungrouped).
+  // Skip suppression for tiny layers — with so few nodes, even single-item
+  // boxes carry useful folder context that shouldn't be discarded.
+  const ungrouped: string[] = [];
+  if (nodes.length >= MIN_NODES_FOR_SUPPRESSION) {
+    containers = containers.filter((c) => {
+      if (c.nodeIds.length === 1) {
+        ungrouped.push(c.nodeIds[0]);
+        return false;
+      }
+      return true;
+    });
+  }
+
+  return { containers, ungrouped };
+}
diff --git a/understand-anything-plugin/packages/dashboard/src/utils/louvain.ts b/understand-anything-plugin/packages/dashboard/src/utils/louvain.ts
new file mode 100644
index 0000000..5e06153
--- /dev/null
+++ b/understand-anything-plugin/packages/dashboard/src/utils/louvain.ts
@@ -0,0 +1,12 @@
+import type { GraphEdge } from "@understand-anything/core/types";
+
+/** Returns [nodeId, communityId] for every node provided. */
+export function detectCommunities(
+  _nodeIds: string[],
+  _edges: GraphEdge[],
+): Map<string, number> {
+  // Real implementation arrives in Task 3. Stub: every node in community 0.
+  const m = new Map<string, number>();
+  for (const id of _nodeIds) m.set(id, 0);
+  return m;
+}