This explains the additional steps required to configure a 3rd-party Source mod, which is any game located under the "SourceMods" directory in the "SteamApps" folder.
Instructions:
1) Enter Setup, click Add

2) Expand the Advanced section (click the double orange downward-arrows).
3) Check off "Use alternate Game Audio Directory".
4) In the field below, enter the parent directory of the game that the mod is based off of:
(for most mods, this will be the "source sdk base" directory.)
*If you're having trouble finding the correct folder, please see the remarks section below.
5) Click Ok

Remarks:
These extra steps are necessary because 3rd-party source mods use the same Game Audio Directory as the game they are modded from (not to be confused with the game directory).
In most cases, this directory will either be the "source sdk base" or "half-life 2" directory.
For more information on step 4 and the GAD see the manual sections:
Game audio directory
Finding the Game audio directory