Nios II IDE Projects

That's called a "Managed Library" (it's one of the choices for when you create a project). It will create all the necessary files for bringing it into your application project. First you create the managed library and compile it (release or debug mode). Then in your application project you have to specify the: Library name, the library archive (.a file) search path, and the library include path (note this is all from memory and unfortunately I'm not at a machine that I can confirm this with). But in short the managed library has the source code you want to put in a common folder, and your application includes it (using the managed library and the common include files)