Discharges of oily water are common among a number of commercial operations. If unregulated these effluents can lead to both short and long term adverse environmental impacts. Development efforts were undertaken in this study for a robust ultrasonic based device to monitor separation of oil and water from oily water effluents. Most of these separations are carried out in gravity settlers where several problems are encountered. These include periodic temperature variations (often over a 25-50 degrees C range), changes in composition of the oily phase, and presence of suspended impurities as well as fouling conditions. The device incorporates an innovative low cost self-correction feature to minimize measurement errors under such difficult and dynamic conditions. This feature allows continuous in-situ measurement of acoustic velocity, a key parameter required for oil depth measurements, giving accuracy within +/- 2 %. The development plans moved progressively from proof-of-concept to prototype of the device with a systematic strategy to improve reliability and accuracy at each stage. These included selection of appropriate transducer frequency and tests with suspended and settled impurities. After initial evaluations, a device configuration with a transducer mounted on a guided float was recommended for further development efforts. The transducer was placed facing down at the centre of the float designed to move up and down with the liquid level in the tank.