My son has a hard time distinguishing between something being truly challenging or just challenging for him to complete because it's repetitive, tedious, or something he already knows. So, if I ask him if it's challenging enough he'll say yes, but I've come to learn that the inattention is my clue that it's actually not challenging enough. I think if it became too challenging, you'd see him NOT completing assignments or major frustration.
If you're dealing with underachievement like we are, forcing our ds6 to do work that isn't a challenge is like torture and only makes it worse. It's a toughie because I know how hard it is to get what he needs in the classroom.
Why would he have to bring the project home? She wouldn't let him work on that at school, or are you saying he wouldn't have time b/c he'd still have to complete the other work? If he could do it at school, would it motivate him to get his other work finished quickly so he can get to the "fun stuff?"
Sorry; I know it's so frustrating. We ultimately had to resort to homeschooling because of the same issues that just wouldn't go away. I think it's great that you saw the improvement earlier in the school year. That says there's hope. What did they do differently during that time period that held his interest?