Ecosystems in the southwestern U.S. are hotspots for climate change, and are predicted to experience continued warming and drying. In these water-limited systems, the balance between herbaceous and woody plant abundance impacts biodiversity and ecosystem processes, highlighting the need to understand how climate change will influence functional composition. However, variability in topo-edaphic conditions, notably soil texture and depth, as well as a long history of disturbance, confound efforts to quantify specific climatic controls over plant functional composition. Here, we utilized a mechanistic soil water model and identified the timing and depth at which soil moisture related most strongly to the balance between grass and shrub dominance in the Southern Colorado Plateau. Shrubs dominate where there is high soil moisture availability during winter, and where temperature is more seasonally variable, while grasses are favored where moisture is available during summer and temperatures are higher. Climate change projections indicate increases in seasonal temperature variability and decreases in summer soil moisture, which both favor shrub dominance. However, projections also include substantial and reliable increases in temperature, which favors grass dominance. Rising temperatures overwhelm both the soil moisture and temperature variability effects favoring shrubs such that our models indicate increasing grasses at these sites. This approach, which incorporates local, edaphic factors at sites protected from disturbance, improves understanding of climate change impacts on plant functional composition and may be useful in other complex dryland regions with high edaphic and climatic heterogeneity.