Incorporating valve lift and variable flow rate in a compressed air engine involves understanding the relationship between mechanical power, torque, and flow rate. The discussion emphasizes that the power produced is linked to the force on the piston and its speed, rather than just the energy from the fluid flow due to losses like turbulence. Calculating mass flow into the cylinder is essential for determining pressure as a function of crank angle, which can then be used to derive torque. The conversation also touches on the need to adapt calculations to account for flow rate instead of pressure, particularly in modified engine designs. Accurate modeling of these parameters is crucial for optimizing engine performance.