It appears, even using Visual Studio 2012 I ran into this bug (originally posted for VS 2010):
Bug 571961 (marked as closed) - "Unable to Copy File"
This bug throws the "Unable to copy file... because it is being used by another process" error. The workaround worked for me - clean the project. Close Visual Studio. Re-open VS. Build the project. Following this process allowed me to build my service.
Additionally, on repeated builds, part of the issue was the need to "stop" the service in the Services manager before builds. be sure not to forget this.