Here's an excellent reply on this issue from Jeffrey Fisher on another Vegas forum.
The Project Properties drive the preview. For example, you keep Project Properties at DV and then add all HDV on the timeline. As you play your project, Vegas scales the HDV to DV for preview -- result: your computer works harder and you probably can't sustain full frame rate. So, you should always set the Properties to match the majority of the clips on your timeline for the best playback performance. It also makes sense to set with the output in mind, too (e.g. widescreen vs. 4:3).
Also note that all generated media, titles and such, are scaled to match the Project Properties, too. So keep your resolutions and aspect ratio in mind for that, too.
When it comes to the render, you can indeed override the Project Properties and render to anything (yeah Vegas!). Vegas does its conversions during the render.