An easy way to tell if you need to lap your stuff is to get a straight blade razor and hold it up to the bottom of the HS. Run it back and forth along while looking underneath to see if any light shines through. If you see light, you might need to lap it.
I was not planning on lapping my CPU before I used it, but once I held the razor up to it and saw just how bad it was, I figured no sense even putting it in if I knew the performance would suck.
Perhaps I lap my stuff differently, but I "wet sand" mostly. This consists of a small bowl of warm water and a couple drops of Dawn dishwashing liquid. I dab my finger into the water and dab it against the sandpaper leaving one healthy drop. Then I place the HS or CPU on top of it and do smallish circles spreading the liquid out. Once I get the liquid spread over an area, I go back and forth, up and down, circles clockwise and counter-clockwise. I usually start out with a 220-grit and move to 400-grit after 15ish minutes. Whenever one area of the sandpaper is "soiled", dab a drop of water in another area, clean off the bottom of the Heatsink with a paper towel and soapy water, and start with small circles again.
One thing to remember about lapping is that the heavy removal needs to be handled with the lower grit or you will go nuts with the finer stuff. If you still see a lot of the nickel plating on top, you probably need to keep going with the lower grit. If you can just barely see some nickel, then it is time to move up to the 400. Same process with each increase in grit. Clean the bottom of the HS and put a small dab of water/dawn mixture in the center and go nuts.
I usually do 220 (15 minutes) > 400 (15 minutes) > 600 (10 minutes) > 800 (10 minutes) > 1000 (10 minutes) > 2000 (10 minutes) > plain paper (however long it takes for mirror finish). I highly recommend masterbating before beginning the lapping process, because after an hour plus of back and forth action on a heavy Heatsink, your forearm and bicep are pretty tired!!
Remember to clean off the bottom of the HS or CPU often. When you are done, use a Q-tip and some 91% isopropyl alcohol to clean the surface really well. Alternate wet Q-tip with dry Q-tip to get any foreign particles off.