Like QGIS and the plugins, the projects are translated with the Qt translation process. Means, it makes the translation according to a Qt Compiled Translation Source File (.qm file). When the user opens a project, QGIS checks for a .qm file laying in the same folder like the .qgs file, having the same name like the .qgs file and having the language-code as postfix of the users language (the language configured in the QGIS settings). To create the translation, in the project settings is an option to generate the .ts file, that can edited by programs like Qt Linguist or Transifex.
More information in this blog post
This feature was funded by QGIS Usergroup Switzerland and QGEP Project
This feature was developed by David Signer (OPENGIS.ch)