The best sessions I have had with artists who aren't "all that" were the ones that I bite my tonge about my opinion on their talent. I have seen too many times where the people that they sell their CD's to have a different opinion!! LOL Really. In addition, it forced me to think of better ways to communicate with the client on how to get a better take. I use some really clever one's!:
If the singer is maybe too dynamic, I might bump the preamp up a little too loud and let them rip away! Then I show them that the preamp distorts rather easily, and that maybe if they could control their dynamics a bit, all will be well. When they start to settle in, I back off the preamp a bit.
If the drummer is maybe not so in the pocket, I might setup a mix scene on the digital console where everybody but the drummer is track delayed and quickly switch between the real scene and that for playback to them. When the drummer hears he is rushing a LOT (artificially of course..)they usually fall back JUST enough to get closer to the pocket.
For out of tune singer, try having them turn down the headphone mix, of only using one pad of the headphones. These two things alone can get a flat singer closer to proper pitch in a hurry!
While none of these things work all the time, they do sometimes. I figure that they are much easier to do, and are a lot better than saying "hey, that sucked!". Telling them they suck seldom keeps them from continuing on with the session, but it sure manages to make them not trust you anymore.
I have found that when I keep my mouth shut that they come back later and start asking the questions of what I think was wrong. When the artist isn't in the hear of battle, they tend to be a bit more receptive to critisism and suggestions on how to improve. Seldomly will an artist that sucks be able to change too much in the studio from being told they are not ready to record. Often, a LOT of encouragement helps though!!! Better musicians can usually take an occasional "you sucked on that one" comment in stride and do better the next take. Poor musicians though NEED to be lied to for the most part if you want to get anywhere in the session. As an engineer you have to assess the situation very fast and stick to your guns. If the client sucks and potentially sensitive about it, give encouragement and hold back your negative comments. Like I said earlier, critisism will usually not deter them from continuing the session and will just make them so self conscious that they will never improve!
If you are producing the client, then all performance issues SHOULD have been dealt with during pre-production and rehearsals! If you didn't deal with that then, you failed to do your job. I once had a client I produced that wanted to start tracking before I felt they were ready for it. They insisted. I said fine, but I will not decide what is a "take" or not, but would make decisions about the sonics. They agreed and all was well. They found out in short order that indeed they were not ready. I didn't rub it in, it didn't need to be rubbed in. They knew I was right. But, it was their money to spend.
Son of M, that is a great story.
Light, I doubt that your career is going to be defined by a crappy band! I try to remember that. I try to do just the job I am paid to do. I have heard VERY bad sounding stuff done by Larry Crane of local bands here! The problems weren't his! The bass player is this one particular band admitted that the band had a LOT of say in how the mix was done, and Larry delivered what they wanted. I doubt Larry is sweating that his reputation is at stake on this lowly little local bands 5 song demo even though the mix sucked pretty bad! Now, indeed, he can afford a few of these kinds of products to release because he has plenty in the past that sound good. If you are so in need of killer product, produce something on your own to add to your portfolio. I have seen local engineers stay VERY busy producing nothing but crap! There is a big market for crap! Don't underestimate the living you can make working on crap!

But really, if you are paid to engineer, 9 times out of 10, the band will remember your positive attitude and encouragement more than any percieved lack of skills you might have displayed! In the end, good musicians will hear the rather poor playing skills of the artist, and will know the difference between bad engineering and bad band decisions! You have little to fear from giving a client what they want. If you stay busy, good musicians will wonder why and will inquire. It is then that you can explain anything pertinent about the other sessions and play them your better work in your portfolio.
Just some of my ramblings on this subject. I have learned the hard way to just do my job and keep my opinions as neutral and positive as possible concerning the "talent" or lack there of.
Ed