I'm at my wits end. I have googled and tried every solution, nothing seems to work! How do you get highlighting items to work with the restoration project. I've seen people say you edit the ddraw.ini file, but I tried doing what they say and it doesn't work. I also read something about the sfall mod, but apparently that comes with the RP mod, and if you try and overwrite the ddraw.ini file with with the one from the sfall mod, you get an error in game.

I'm out of ideas, please help!

Very strange question. You use only ddraw.dll and ddraw.ini which come with RP. You should not overwrite anything after mod installation. Doing so will break things. And then you just hold Left Shift for items to be highlighted. It's this simple.
If Shift does not work then you probably did not replaced ddraw.dll. Because GOG's Fallouts come with GOG's ddraw.dll which fixes graphics problems but it is NOT SFall. This one should be replaced during mod installation. But with a proper version.
Just read RP installation manual carefully and follow the steps.

I beg to differ. I've always kept sfall up-to-date and I've never had any problems with RP mod (except for bugs in sfall itself, which were usually fixed ASAP in the next update). You just have to keep (merge/add) RP's entries in ddraw.ini file and that's it.

You can fix the appearing error message by putting ModifiedIni=42 into your ddraw.ini (identical to what you have in RP ddraw.ini). Sfall in RP is quite old, it's 2014. With newer sfall you can enable more advanced customizable highlighting i.e. https://github.com/BGforgeNet/FO2tweaks#user-content-expanded-highlighting.

If you do install new sfall over the old RP's sfall apart from the ModifiedIni line you also have to turn on the BoostDialogueScripts option (or whatever it's called). Without it, the game crashes at EPA.