Maybe some day, Sony will change this message. Unless you have your system set up to use quotas (not the default for most Windows systems), the message makes no sense. Worse, it confuses some users.
Folders (what, in the old days, we called "directories") do not have "space." Drives have "space," and that is probably where you have a lack of space. Specifically, the harddrive to which you are preparing your project files may be low on space.
Go to Windows Explorer, right-click the drive letter for the drive you're preparing to, and choose Properties. How much space is free? If it's less than 10GB, DVDA probably would prefer that you have more. If that's the case, the usual solution is to start getting rid of old files you don't need. Start by clicking the Disk Cleanup button in that Properties window, follow the prompts, and see if that helps.
Another solution would be to just prepare to a different harddrive if you've got one.
If, on the other hand, you know that the drive you're preparing to has plenty of space (it needs to have at least as much as your project size plus a little extra), DVDA might be wrong. I seem to recall hearing of that happening, but darned if I can find any related threads right now.