Well that is why I no longer work around big studios. I can chose who I work with, because my overhead is so low I don't need to take just anyone who can afford it.
If I did have to deal with a band that needed to practice more, I would do so as soon as possible. What I would say is, "you know, you guys have some really good songs, and really good (chops or feel or whatever). You just are not quite ready to record. You have a couple things you need to work on. If you really want to, I would be happy to record you guys, but you are going to be spending much more money than you need to. If you were to go and spend some time practicing (whatever they most need help with), we could do a lot more with your money."
I would also give them the name of a really good musician who gives private lessons, and suggest they get the teacher to help them with their difficulties. You should talk to the teacher beforehand to make sure they would be interested in working with a band, or if you want to you could offer to be the one helping them with this stuff. The teacher would kind of be taking the part of a producer, and you might even sell it to the band as working with a producer on pre-production.
Mostly, though, I would no longer choose to work with a band that needed that much help.
Hey littledog, I used to live in Boston (for seven years, including the time I was at the dreaded Berklee). I miss the city, particularly walking down Lansdowne Street at 10:00 on a Friday night.
Light
"Cowards can never be moral."
M.K. Gandhi