Real-Time Simulation (RTS) Games/Engines for Serious Simulations
The use of first-person shooter (FPS) engines such as Quake, Unreal, etc. has gotten plenty of press in its application for serious simulations (military, public safety, etc.) but the same level of interest hasn't been shown (yet) for the engines from the real-time simulation (RTS) genre.
Los Alamos built a serious sim called "Epi-Sim" (Epidemic Simulation) that is promoted with a very Sim City feel to it but doesn't appear to use the Sim City engine - just plays upon that popular metaphor for people to understand the sim or get interested.
However, several of the popular RTS games/engines do offer a significant level of customization and there are "mods" available for these (as with the FPS games/engines).
One RTS engine used for this purpose is Rise of Nations (http://www.bighugegames.com/riseofnations/). Several other RTS games come with toolkits that provide some level of customization. These include Empire Earth II (http://www.empireearth2.com/ ), Rome: Total War (http://www.totalwar.com/community/rome.htm ), and Civilization IV (http://www.2kgames.com/civ4/home.htm).
The tools available general include a world-builder for terrain, structures, waterways, etc. You also usually get a scripting engine/editor - most follow the paradigm of inheriting/overloading provided types and re-writing event listners - i.e. you can re-write how a "citizen" or "merchant" is supposed to behave whenever the "air raid" event happens. Some games/engines also include tools for you to include your own 2D and 3D art work.
While it is possible to make some very impressive mods, to some degree the learning curve is even steeper than for the FPS games/engines. I say this because a result of the popularity of FPS games/engines is the growth of supporting materials - books, videos, tutorial, websites, etc. - that document (at least minimally) how to use the FPS tools. Most of the RTS games/engines (at least the ones described above) offer some documentation on how but it isn't always easy to figure out - there hasn't (yet) developed a 3rd party industry/community around the RTS engines to produce better materials.
There are several mods for these games/engines recreating historical events - e.g. you can play Napolean at the Battle of Waterloo. Some of these mods are available by browsing the fan/community sites for the respective games. For Rise of Nations see http://www.bighugegames.com/riseofnations/community.html or http://www.microsoft.com/games/riseofnations/community.asp.
Another variant that is popular is the machinima - or using the engine to make a movie-style presentation. In this case, the mod isn't played as much as it is shown. A notable example of this was the use of Rome: Total War movies to support the show Decisive Battles on the History Channel (see http://www.totalwar.com/community/history.htm).
If you are interested in using RTS games/engines, you may also be interested in the role-play (RPG) genre. In entertainment products, this is most often used for role-play/fantasy games but there are documented cases of it being used for more serious purposes - including articles/posts by the Assoc. of Computing Machinery (www.acm.org) and at MIT's Education Arcade and Media Lab. One of the most popular and best documented toolkits from this genre, is from the game NeverWinter Nights by BioWare (http://nwn.bioware.com/).