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My personal favorite method is similar to this and we use it at my current company.

The big difference of course is that we pay for the candidates time. Not everyone has 5-20 hours to burn on a project in terms of free time. It's a big commitment, especially for the folks with families.

Some key benefits of a project for our interview process:

* We get to see a candidates programming skills with a greenfield project. This gives us a chance to analyze all aspects of development (organizing code, creating tests, using best practices, ect.).

* Candidates get to act as if they are on the team, so they are encouraged to ask questions, get feedback, ect. throughout the project. This gives us a chance to see how well they communicate in addition to their programming skills, which is REALLY important to us, since we're an entirely distributed team.

* The project is not throwaway for the candidate nor us. We usually have an ongoing list of libraries and tools that we need internally for our projects, so the candidate is actually contributing to our mission. This also justifies paying a candidate for their time



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