As a contractor I have said this to my client. I did it because he was a 20 years old student and I felt responsible for him.
He went on with the project though. Yes, it was a failure.
I think this should also extend to any sort of critical relationship, such as when someone's success or failure depends very much on your actions and advice (for example, in mentor-mentee relationships as well as someone is paying you).
There are many good ways of pointing out faults that don't boil down to "this sucks" and trying to sugar coat, gloss over, or hint at major problems is doing a major disservice to whoever is on the other side of the relationship.