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Buildpacket is a tool used to create lrp packages. When creating packages manually, there are many things that can go wrong (forgetting to copy a file, wrong file permissions) - buildpacket tries to eliminate those problems. It uses a package definition in XML format to know which files to copy (and what permissions they should have). It also automatically generates the lrcfg files.
This is the one instance where you will have to be root to use buildpacket - since we will have to change ownership of some files, which only root can do. To avoid problems, it is advised to use fakeroot.
Since it is not obvious at first, a little clarification: buildpacket creates lrp packages (packagename.lrp) that are defined in buildtool setups (unfortunately, those are sometimes also called packages). Those two need not have the same name. For example, there is a buildtool setup for lcd4linux - which has a package definition for buildpacket for a package called lcd4linx.lrp
Furthermore, one buildtool setup can contain definitions for more than one lrp package - the openssl buildtool setup, for example, contains definitions for libssl.lrp and openssl.lrp.
It is important to not confuse those two notions of "packages". The reason this is a little confusing is mainly historical - plus the fact that one source tarball can produce the binaries for several packages. This problem is common to other packaging systems (and the tools that generate the packages) - one "source rpm" for can create lots of individual rpm files, depending on how modular the packagers wanted to make things.