Oh, looking at the pastebin, i think i realize how it's intended to work. There is no depth test at all on the SM, and also there is no self shadowing possible. You only want to draw the shadow to the floor with projective texturing. Like Outcast did, which i think was the first game using SM.
Then the fix would be easy?
Draw the terrain.
Draw the projected shadow.
Only after that draw the character (and buildings). So it receives no shadows.
However, i don't think it's possible to get correct shadows from buildings on the character this way. You could only draw them to the ground as well, but no self shadowing, no shadowing to other architecture, no shadowing to the character.