Project-based industries are among the largest industries in the global economy. Innovation research to date, however, has largely focused on traditional, hierarchical industries. When project-based industries are included in innovation studies, the analyses rarely explore the implications of organizational and industry structure on diffusion. A review of the literature on innovation in the project-based construction, motion picture, pharmaceutical, biotechnology, and healthcare industries suggests that organizing around projects creates difficulties for innovation. The extra effort required to diffuse some innovations leads to an innovation gap for project-based industries. A closer examination of the scope of an innovation and the inter-organizational flow of knowledge holds the key to understanding this innovation gap. In this paper we explore the impact of innovation scope and inter-organizational knowledge flows in the residential building industry based on case evidence of wall system innovations.