Sometimes the climax of an undergraduate course of study, sometimes required for an undergraduate degree, the senior project (which can go by other names, like thesis) serves a similar purpose to a Master's Thesis. It give the college student the opportunity to make a small contribution to their field of study, take their studies in an independent direction of their interest, and give them the opportunity to apply their learning in a more directed and long term sort of way.
In my limited experience as a senior at a small, midwestern research university, senior projects come in a few types. There is the senior research paper, which people at my school typically complete for the purposes of graduating with honors in a humanities or social science sort of field, and may involve lots of time in the library. There is the senior design project, which could fall into an engineering field and involves the design and/or testing of something that falls within the class of objects the student has been taught to analyze and understand for four years. There is also a senior research project, which typically is completed by science majors in fields like chemistry, biology, and physics. The last two could be theoretical, laboratory work, computational work, or anything else. The flexibility is really tremendous.
The best aspect of senior projects is that they offer the opportunity for an ambitious 21-year-old undergraduate to work with accomplished professors at the forefront of their fields. While there are, in some situations and schools, opportunities for undergraduates to contribute to their professors' research projects as subordinates, the senior project allows them what is likely their first chance to be in charge and make executive decisions about a long-term project (under the advising of some sort of mentor, of course).
Examples of the three types of projects mentioned:
As a physics major, my senior project was originally supposed to be on solid helium. Specifically, I was doing continuous wave NMR on solid He4 doped with He3 and measuring propagation of the He3 through the crystal lattice. It propogated in opposite directions to lattice vacancies, and we were going to be able to detect any anisotropy in the propagation of the vacancies, which would move in straight lines as rays due to the quantum nature of solid HCP Helium.
My roommate, a double major, did a philosophy project on why and if we know we exist, and a political science project critiquing Democracy in America by Alexis de Tocqueville.
My dad, a civil engineering major, designed and built a concrete boat that floated.
Then again, the beauty of college is that anyone can do anything with enough effort, window dressing, and help from the right people: even major in sex. Senior projects are no different, and it is truly fun to hear about what harebrained schemes (or elegant research) the people you drink with have been up for an entire year. In other words, YMMV.