Alan Rinzler has an excellent post today on his The Book Deal blog. He explains why every non-fiction book needs an index. Then he interviews professional indexer Sylvia Coates, who explains how she goes about creating an index.
One interesting point made is that most book contracts specify that the author pays for the indexing of his or her book, yet the publisher hires the indexer and supervises the work. Often authors will try to save that chunk of money (about $1,000) and ask that they be allowed to provide the index themselves. The post explains why that's a bad idea.
My company's contracts do not specify that the author pay for the index, and it has been our policy to absorb that cost ourselves. That way, we can control the quality and the schedule and don't have to constantly explain to authors why they can't index their own books (except, of course, in the case of Gallery of Best Resumes author David Noble, whose wife is a professional indexer, editor, and librarian; I'm always happy to let Ginny do his indexes).