diff --git a/docs/AGENTS.md b/docs/AGENTS.md
index 89edc0d3c..e9b486bb5 100644
--- a/docs/AGENTS.md
+++ b/docs/AGENTS.md
@@ -190,9 +190,8 @@ This project uses **Make** as the primary build orchestrator. See `Makefile` for
 ### General Testing Guidelines
 
 - Always run `make typecheck` after making changes to verify types (checks both main and renderer)
-- **Unit tests should be colocated with their business logic** - Place unit test files (\*.test.ts) in the same directory as the code they test (e.g., `aiService.test.ts` next to `aiService.ts`)
+- **⚠️ CRITICAL: Unit tests MUST be colocated with the code they test** - Place `*.test.ts` files in the same directory as the implementation file (e.g., `src/utils/foo.test.ts` next to `src/utils/foo.ts`). Tests in `./tests/` are ONLY for integration/E2E tests that require complex setup.
 - **Don't test simple mapping operations** - If the test just verifies the code does what it obviously does from reading it, skip the test.
-- E2E and integration tests may live in `./tests/` directory, but unit tests must be colocated
 - Strive to decompose complex logic away from the components and into `.src/utils/`
   - utils should be either pure functions or easily isolated (e.g. if they operate on the FS they accept
     a path). Testing them should not require complex mocks or setup.
diff --git a/src/components/ProjectSidebar.tsx b/src/components/ProjectSidebar.tsx
index 630170ee5..aa23da3a0 100644
--- a/src/components/ProjectSidebar.tsx
+++ b/src/components/ProjectSidebar.tsx
@@ -665,6 +665,12 @@ const ProjectSidebarInner: React.FC<ProjectSidebarProps> = ({
 
   // Normalize order when the set of projects changes (not on every parent render)
   useEffect(() => {
+    // Skip normalization if projects haven't loaded yet (empty Map on initial render)
+    // This prevents clearing projectOrder before projects load from backend
+    if (projects.size === 0) {
+      return;
+    }
+
     const normalized = normalizeOrder(projectOrder, projects);
     if (
       normalized.length !== projectOrder.length ||
diff --git a/src/utils/projectOrdering.test.ts b/src/utils/projectOrdering.test.ts
new file mode 100644
index 000000000..6012cf8db
--- /dev/null
+++ b/src/utils/projectOrdering.test.ts
@@ -0,0 +1,142 @@
+import { describe, it, expect } from "@jest/globals";
+import {
+  sortProjectsByOrder,
+  reorderProjects,
+  normalizeOrder,
+  equalOrders,
+} from "./projectOrdering";
+import type { ProjectConfig } from "@/config";
+
+describe("projectOrdering", () => {
+  const createProjects = (paths: string[]): Map<string, ProjectConfig> => {
+    const map = new Map<string, ProjectConfig>();
+    for (const p of paths) {
+      map.set(p, { workspaces: [] });
+    }
+    return map;
+  };
+
+  describe("sortProjectsByOrder", () => {
+    it("returns natural order when order array is empty", () => {
+      const projects = createProjects(["/a", "/c", "/b"]);
+      const result = sortProjectsByOrder(projects, []);
+      expect(result.map(([p]) => p)).toEqual(["/a", "/c", "/b"]);
+    });
+
+    it("sorts projects according to order array", () => {
+      const projects = createProjects(["/a", "/b", "/c"]);
+      const result = sortProjectsByOrder(projects, ["/c", "/a", "/b"]);
+      expect(result.map(([p]) => p)).toEqual(["/c", "/a", "/b"]);
+    });
+
+    it("puts unknown projects at the end in natural order", () => {
+      const projects = createProjects(["/a", "/b", "/c", "/d"]);
+      const result = sortProjectsByOrder(projects, ["/c", "/a"]);
+      // /c and /a are ordered, /b and /d are unknown and should appear in natural order
+      expect(result.map(([p]) => p)).toEqual(["/c", "/a", "/b", "/d"]);
+    });
+  });
+
+  describe("reorderProjects", () => {
+    it("moves dragged project to target position", () => {
+      const projects = createProjects(["/a", "/b", "/c", "/d"]);
+      const currentOrder = ["/a", "/b", "/c", "/d"];
+      // Drag /d onto /b (move /d to position 1)
+      const result = reorderProjects(currentOrder, projects, "/d", "/b");
+      expect(result).toEqual(["/a", "/d", "/b", "/c"]);
+    });
+
+    it("returns current order if dragged or target not found", () => {
+      const projects = createProjects(["/a", "/b", "/c"]);
+      const currentOrder = ["/a", "/b", "/c"];
+      const result = reorderProjects(currentOrder, projects, "/x", "/b");
+      expect(result).toEqual(["/a", "/b", "/c"]);
+    });
+
+    it("returns current order if dragged === target", () => {
+      const projects = createProjects(["/a", "/b", "/c"]);
+      const currentOrder = ["/a", "/b", "/c"];
+      const result = reorderProjects(currentOrder, projects, "/b", "/b");
+      expect(result).toEqual(["/a", "/b", "/c"]);
+    });
+  });
+
+  describe("normalizeOrder", () => {
+    it("removes paths that no longer exist", () => {
+      const projects = createProjects(["/a", "/b"]);
+      const order = ["/a", "/b", "/c", "/d"];
+      const result = normalizeOrder(order, projects);
+      expect(result).toEqual(["/a", "/b"]);
+    });
+
+    it("appends new projects to the end", () => {
+      const projects = createProjects(["/a", "/b", "/c", "/d"]);
+      const order = ["/b", "/a"];
+      const result = normalizeOrder(order, projects);
+      expect(result).toEqual(["/b", "/a", "/c", "/d"]);
+    });
+
+    it("preserves order of existing projects", () => {
+      const projects = createProjects(["/a", "/b", "/c"]);
+      const order = ["/c", "/a", "/b"];
+      const result = normalizeOrder(order, projects);
+      expect(result).toEqual(["/c", "/a", "/b"]);
+    });
+  });
+
+  describe("equalOrders", () => {
+    it("returns true for identical arrays", () => {
+      const a = ["/a", "/b", "/c"];
+      const b = ["/a", "/b", "/c"];
+      expect(equalOrders(a, b)).toBe(true);
+    });
+
+    it("returns false for arrays with different lengths", () => {
+      const a = ["/a", "/b"];
+      const b = ["/a", "/b", "/c"];
+      expect(equalOrders(a, b)).toBe(false);
+    });
+
+    it("returns false for arrays with different order", () => {
+      const a = ["/a", "/b", "/c"];
+      const b = ["/a", "/c", "/b"];
+      expect(equalOrders(a, b)).toBe(false);
+    });
+
+    it("returns true for same reference", () => {
+      const a = ["/a", "/b", "/c"];
+      expect(equalOrders(a, a)).toBe(true);
+    });
+  });
+
+  describe("Bug fix: empty projects Map on initial load", () => {
+    it("returns empty array when projects Map is empty", () => {
+      // This documents the bug scenario:
+      // 1. localStorage has projectOrder = ["/a", "/b", "/c"]
+      // 2. Projects haven't loaded yet, so projects = new Map()
+      // 3. If normalization runs, it would clear the order
+      const emptyProjects = createProjects([]);
+      const order = ["/a", "/b", "/c"];
+      const result = normalizeOrder(order, emptyProjects);
+
+      // normalizeOrder returns [] when projects is empty
+      expect(result).toEqual([]);
+
+      // Fix: ProjectSidebar.tsx skips normalization when projects.size === 0
+      // This prevents clearing the order during initial component mount
+    });
+
+    it("normalizes correctly after projects load", () => {
+      // After projects load, normalization should work normally:
+      // 1. projectOrder is still ["/a", "/b", "/c"] from localStorage
+      // 2. Projects are now loaded with an additional project ["/d"]
+      // 3. Normalization should append the new project
+      const projectOrder = ["/a", "/b", "/c"];
+      const loadedProjects = createProjects(["/a", "/b", "/c", "/d"]);
+
+      const result = normalizeOrder(projectOrder, loadedProjects);
+
+      expect(result).toEqual(["/a", "/b", "/c", "/d"]);
+    });
+  });
+});