diff --git a/Makefile b/Makefile
index a9e6c4c838eb..4da73c7a6741 100644
--- a/Makefile
+++ b/Makefile
@@ -66,6 +66,7 @@ CAPD_DIR := $(TEST_DIR)/infrastructure/docker
 CAPIM_DIR := $(TEST_DIR)/infrastructure/inmemory
 TEST_EXTENSION_DIR := $(TEST_DIR)/extension
 GO_INSTALL := ./scripts/go_install.sh
+GO_TOOLS_BUILD := ./hack/go-tools-build.sh
 OBSERVABILITY_DIR := hack/observability
 
 export PATH := $(abspath $(TOOLS_BIN_DIR)):$(PATH)
@@ -101,7 +102,7 @@ KUSTOMIZE_BIN := kustomize
 KUSTOMIZE := $(abspath $(TOOLS_BIN_DIR)/$(KUSTOMIZE_BIN)-$(KUSTOMIZE_VER))
 KUSTOMIZE_PKG := sigs.k8s.io/kustomize/kustomize/v5
 
-SETUP_ENVTEST_VER := v0.0.0-20240215143116-d0396a3d6f9f
+SETUP_ENVTEST_VER := v0.0.0-20240506183901-d950bb92291d
 SETUP_ENVTEST_BIN := setup-envtest
 SETUP_ENVTEST := $(abspath $(TOOLS_BIN_DIR)/$(SETUP_ENVTEST_BIN)-$(SETUP_ENVTEST_VER))
 SETUP_ENVTEST_PKG := sigs.k8s.io/controller-runtime/tools/setup-envtest
@@ -1456,7 +1457,7 @@ $(KUSTOMIZE): # Build kustomize from tools folder.
 	CGO_ENABLED=0 GOBIN=$(TOOLS_BIN_DIR) $(GO_INSTALL) $(KUSTOMIZE_PKG) $(KUSTOMIZE_BIN) $(KUSTOMIZE_VER)
 
 $(SETUP_ENVTEST): # Build setup-envtest from tools folder.
-	GOBIN=$(TOOLS_BIN_DIR) $(GO_INSTALL) $(SETUP_ENVTEST_PKG) $(SETUP_ENVTEST_BIN) $(SETUP_ENVTEST_VER)
+	GOBIN=$(TOOLS_BIN_DIR) $(GO_TOOLS_BUILD) $(SETUP_ENVTEST_PKG) $(SETUP_ENVTEST_BIN) $(SETUP_ENVTEST_VER)
 
 $(TILT_PREPARE): $(TOOLS_DIR)/go.mod # Build tilt-prepare from tools folder.
 	cd $(TOOLS_DIR); go build -tags=tools -o $(BIN_DIR)/tilt-prepare sigs.k8s.io/cluster-api/hack/tools/internal/tilt-prepare
diff --git a/hack/go-tools-build.sh b/hack/go-tools-build.sh
new file mode 100755
index 000000000000..b076d6498f8f
--- /dev/null
+++ b/hack/go-tools-build.sh
@@ -0,0 +1,76 @@
+#!/usr/bin/env bash
+# Copyright 2023 The Kubernetes Authors.
+#
+# Licensed under the Apache License, Version 2.0 (the "License");
+# you may not use this file except in compliance with the License.
+# You may obtain a copy of the License at
+#
+#     http://www.apache.org/licenses/LICENSE-2.0
+#
+# Unless required by applicable law or agreed to in writing, software
+# distributed under the License is distributed on an "AS IS" BASIS,
+# WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
+# See the License for the specific language governing permissions and
+# limitations under the License.
+
+set -o errexit
+set -o nounset
+set -o pipefail
+
+if [ -z "${1}" ]; then
+  echo "must provide module as first parameter"
+  exit 1
+fi
+
+if [ -z "${2}" ]; then
+  echo "must provide binary name as second parameter"
+  exit 1
+fi
+
+if [ -z "${3}" ]; then
+  echo "must provide version as third parameter"
+  exit 1
+fi
+
+if [ -z "${GOBIN}" ]; then
+  echo "GOBIN is not set. Must set GOBIN to install the bin in a specified directory."
+  exit 1
+fi
+
+rm -f "${GOBIN}/${2}"* || true
+
+ORIGINAL_WORKDIR="$(pwd)"
+TMP_MODULE_DIR="${2}.tmp"
+
+# Create TMP_MODULE_DIR to create a go module for building the binary.
+rm -r "${TMP_MODULE_DIR}" || true
+mkdir -p "${TMP_MODULE_DIR}"
+cd "${TMP_MODULE_DIR}"
+
+# Initialize a go module and place a tools.go file for building the binary.
+go mod init "tools"
+# Set require for "sigs.k8s.io/cluster-api" to let go resolve the tools version via the CAPI version.
+go mod edit -replace "sigs.k8s.io/controller-runtime/tools/setup-envtest=github.com/sbueringer/controller-runtime/tools/setup-envtest@v0.0.0-20240506183901-d950bb92291d"
+
+# Create go file which imports the required package and resolve dependencies.
+cat << EOF > tools.go
+//go:build tools
+// +build tools
+package tools
+
+import (
+  _ "${1}"
+)
+EOF
+
+go mod tidy
+
+# Build the binary.
+go build -tags=tools -o "${GOBIN}/${2}-${3}" "${1}"
+
+# Get back to the original directory and cleanup the temporary directory.
+cd "${ORIGINAL_WORKDIR}"
+rm -r "${TMP_MODULE_DIR}"
+
+# Link the unversioned name to the versioned binary.
+ln -sf "${GOBIN}/${2}-${3}" "${GOBIN}/${2}"