diff --git a/.husky/pre-commit b/.husky/pre-commit
index 02d51b16..f7def897 100755
--- a/.husky/pre-commit
+++ b/.husky/pre-commit
@@ -140,18 +140,31 @@ if git diff --cached --name-only | grep -q "^apps/backend/.*\.py$"; then
   (
     cd apps/backend
     # Tests to skip: graphiti (external deps), merge_file_tracker/service_orchestrator/worktree/workspace (Windows path/git issues)
-    IGNORE_TESTS="--ignore=../../tests/test_graphiti.py --ignore=../../tests/test_merge_file_tracker.py --ignore=../../tests/test_service_orchestrator.py --ignore=../../tests/test_worktree.py --ignore=../../tests/test_workspace.py"
-    if [ -d ".venv" ]; then
-      # Use venv if it exists
-      if [ -f ".venv/bin/pytest" ]; then
-        PYTHONPATH=. .venv/bin/pytest ../../tests/ -v --tb=short -x -m "not slow and not integration" $IGNORE_TESTS
-      elif [ -f ".venv/Scripts/pytest.exe" ]; then
-        # Windows
-        PYTHONPATH=. .venv/Scripts/pytest.exe ../../tests/ -v --tb=short -x -m "not slow and not integration" $IGNORE_TESTS
+    # Also skip tests that require optional dependencies (pydantic structured outputs)
+    IGNORE_TESTS="--ignore=../../tests/test_graphiti.py --ignore=../../tests/test_merge_file_tracker.py --ignore=../../tests/test_service_orchestrator.py --ignore=../../tests/test_worktree.py --ignore=../../tests/test_workspace.py --ignore=../../tests/test_finding_validation.py --ignore=../../tests/test_sdk_structured_output.py --ignore=../../tests/test_structured_outputs.py"
+    
+    # Determine Python executable from venv
+    VENV_PYTHON=""
+    if [ -f ".venv/bin/python" ]; then
+      VENV_PYTHON=".venv/bin/python"
+    elif [ -f ".venv/Scripts/python.exe" ]; then
+      VENV_PYTHON=".venv/Scripts/python.exe"
+    fi
+    
+    if [ -n "$VENV_PYTHON" ]; then
+      # Check if pytest is installed in venv
+      if $VENV_PYTHON -c "import pytest" 2>/dev/null; then
+        PYTHONPATH=. $VENV_PYTHON -m pytest ../../tests/ -v --tb=short -x -m "not slow and not integration" $IGNORE_TESTS
       else
-        PYTHONPATH=. python -m pytest ../../tests/ -v --tb=short -x -m "not slow and not integration" $IGNORE_TESTS
+        echo "Warning: pytest not installed in venv. Installing test dependencies..."
+        $VENV_PYTHON -m pip install -q -r ../../tests/requirements-test.txt
+        PYTHONPATH=. $VENV_PYTHON -m pytest ../../tests/ -v --tb=short -x -m "not slow and not integration" $IGNORE_TESTS
       fi
+    elif [ -d ".venv" ]; then
+      echo "Warning: venv exists but Python not found in it, using system Python"
+      PYTHONPATH=. python -m pytest ../../tests/ -v --tb=short -x -m "not slow and not integration" $IGNORE_TESTS
     else
+      echo "Warning: No .venv found in apps/backend, using system Python"
       PYTHONPATH=. python -m pytest ../../tests/ -v --tb=short -x -m "not slow and not integration" $IGNORE_TESTS
     fi
   )
diff --git a/CONTRIBUTING.md b/CONTRIBUTING.md
index 376eeb67..ae90bf43 100644
--- a/CONTRIBUTING.md
+++ b/CONTRIBUTING.md
@@ -154,7 +154,7 @@ The project consists of two main components:
 
 ### Python Backend
 
-The recommended way is to use `npm run install:backend`, but you can also set up manually:
+The recommended way is to use `npm run install:backend` (or `npm run install:all` from the root), which automatically installs both runtime and test dependencies. You can also set up manually:
 
 ```bash
 # Navigate to the backend directory
diff --git a/scripts/install-backend.js b/scripts/install-backend.js
index 40d3a4fc..408999db 100644
--- a/scripts/install-backend.js
+++ b/scripts/install-backend.js
@@ -103,6 +103,13 @@ async function main() {
     process.exit(1);
   }
 
+  // Install test dependencies (needed for pre-commit hooks and development)
+  console.log('\nInstalling test dependencies...');
+  if (!run(`"${pip}" install -r ../../tests/requirements-test.txt`)) {
+    console.error('Failed to install test dependencies');
+    process.exit(1);
+  }
+
   // Create .env file from .env.example if it doesn't exist
   const envPath = path.join(backendDir, '.env');
   const envExamplePath = path.join(backendDir, '.env.example');
@@ -126,8 +133,10 @@ async function main() {
     console.warn('Please create a .env file manually if your configuration requires it.');
   }
 
-  console.log('\nBackend installation complete!');
-  console.log(`Virtual environment: ${venvDir}`);
+  console.log('\n✓ Backend installation complete!');
+  console.log(`  Virtual environment: ${venvDir}`);
+  console.log('  Runtime dependencies: installed');
+  console.log('  Test dependencies: installed (pytest, etc.)');
 }
 
 main().catch((err) => {