If you have contacts populated in your project directory, contact lookups in your application records will display project directory contacts by default and present the user with the option to uncheck a checkbox to display all contacts within the lookup list.
If you would like to remove access to the "Only Show Project Directory People" checkbox for most or all users on your domain, simply create a new group at the domain level (across all projects) with the name "Project Directory Administrator".
Once this group has been created for your domain, only users in this group may toggle the "Only Show Project Directory People" checkbox in contact lookups. All other users will only see the current partition's project directory contacts in their contact lookup lists.
*Note: Currently this configuration is based solely on a group named "Project Directory Administrator" existing at the top level partition of a domain. This name must be an exact match for the functionality to take effect. An update allowing users to implement this as a setting will be included in a future release.