diff --git a/app/controllers/header/projects_controller.rb b/app/controllers/header/projects_controller.rb
index dda501b4ea97..d671a47e0a26 100644
--- a/app/controllers/header/projects_controller.rb
+++ b/app/controllers/header/projects_controller.rb
@@ -141,31 +141,28 @@ def user_project_favorites
   # Builds a nested structure from a flat, lft-ordered list of projects.
   # Each level is sorted alphabetically by project name.
   def build_tree(projects)
-    nodes = projects.index_by(&:id).transform_values do |p|
-      { project: p, children: [], matches_query: @matching_ids.nil? || @matching_ids.include?(p.id) }
-    end
-
-    roots = []
-    projects.each do |project|
-      node   = nodes[project.id]
-      parent = nodes[project.parent_id]
+    nodes = Project.build_projects_hierarchy(projects)
+    mark_query_matches(nodes)
+    sort_nodes(nodes)
+  end
 
-      if parent
-        parent[:children] << node
-      else
-        roots << node
-      end
+  def mark_query_matches(nodes)
+    nodes.each do |node|
+      node[:matches_query] = @matching_ids.nil? || @matching_ids.include?(node[:project].id)
+      mark_query_matches(node[:children])
     end
-
-    sort_nodes(roots)
   end
 
   def sort_nodes(nodes)
     nodes.sort_by { |n| n[:project].name.downcase }.each do |node|
       node[:children] = sort_nodes(node[:children])
-      node[:expanded] = filter_mode == "favorited" || node[:children].any? do |c|
-        c[:project].id == @current_project_id || c[:expanded]
-      end
+      node[:expanded] = expanded_node?(node)
+    end
+  end
+
+  def expanded_node?(node)
+    filter_mode == "favorited" || node[:children].any? do |child|
+      child[:project].id == @current_project_id || child[:expanded]
     end
   end
 end
diff --git a/spec/controllers/header/projects_controller_spec.rb b/spec/controllers/header/projects_controller_spec.rb
index 981b9aa42683..7f7695423280 100644
--- a/spec/controllers/header/projects_controller_spec.rb
+++ b/spec/controllers/header/projects_controller_spec.rb
@@ -69,6 +69,27 @@
       expect(response).to render_template(layout: false)
     end
 
+    context "when an invisible project is between two visible projects" do
+      shared_let(:invisible_project) { create(:private_project, name: "Invisible", parent: parent_project) }
+      shared_let(:visible_grandchild) { create(:project, name: "Visible Grandchild", parent: invisible_project) }
+
+      before do
+        create(:member, principal: current_user, project: visible_grandchild, roles: [role])
+      end
+
+      it "nests the grandchild below its nearest visible ancestor", :aggregate_failures do
+        make_request
+
+        tree = assigns(:tree)
+        parent_node = tree.find { |node| node[:project] == parent_project }
+
+        expect(assigns(:projects)).to include(visible_grandchild)
+        expect(assigns(:projects)).not_to include(invisible_project)
+        expect(tree.pluck(:project)).not_to include(visible_grandchild)
+        expect(parent_node[:children].pluck(:project)).to include(visible_grandchild)
+      end
+    end
+
     context "when searching by query" do
       subject(:make_request) { get :index, params: { query: "Beta" } }