I am still not sure what your concern. Have you tried working on project while files are still on USB stick and it is not working. Just note one thing that the project file(with .prel extension) can never become too big as this file contains the information of the project in text format and it has all the references to the media used and other operations performed. Try this and it should work, but make sure usb is mounted before opening the project.
Also, before creating the project you can go to location "C:\Users\<User>\AppData\Roaming\Adobe\Common" and delete all these cache folders. This should create some free space in your pc to work with. These cache files are generated when you import a media into PRE project and this helps optimize the performance during editing. Let me know if this works.
I want to be able to work on a project while the files are still on the USB drive.
That could be kind of challenging because you won't get the immediate response you'll get if you're editing a project on your hard drive. USB connections aren't nearly as fast.
Although if you've got a fast enough computer and a fast enough drive and a very fast connection (maybe USB 3.0) it could be possible. Just know that, if your program seems sluggish and you start getting crashes, that will be the reason why.
Although this will most likely not work at all if you're trying to edit video on a thumb drive, which it sounds like you're trying to do. You can try -- but if it doesn't work, it's not going to work no matter what you do.
And I'd recommend you have at least a 50 gig thumb drive. Video editing leaves a pretty big footprint!