Large take-home projects (and trial employment) totally are better ways to evaluate engineers than interviews. Unfortunately, they require major time commitments from the candidate that many engineers are not able to give. Most (about 80%) engineers select a regular interview if given the choice. I do think they are a good option to offer, but they can't (unfortunately) replace interviews in the majority of cases.
We've also tried debug sections (where we give the candidate a program with bugs in it and ask them to fix test cases). This works great as a portion of the interview (but misses some people with other skills, so it can't be the entire interview).