WED needs to know in which folder it shall look for the models.

In WED there is a list at the left side with 3 registers, one is called presets:
in the manual --> WED --> Presets window -->
"Add Path Adds a new folder to the folder path. Subseqently, sound and entity files from that folder are available in the Add Object menu. The new folder is stored in a PATH statement in the WDL project file. This way the engine also gets access to the folder when running the script. A .c script must be set up in Map Properties for adding a folder."

Hope this helps.