For most people I deal wth, especially those who are do not prefer bluntness, he sandwich method really works the best. In your email you start out by saying something hat they did well or something that went well. You then carefully transition to he bad news (whether that he they are to be fired, you couldn't get the job done, etc) and then you wrap it up with some good news, so that when they are finished reading they aren't left with a bad taste in their mouth.
However this approach doesn't work for everyone, and for some it may even prove to make matters worse between you and the recipient. For those who appreciate bluntness (you should make sure hey are this type!) sometimes breaking the bad news at the start of he conversation/email works best. However even when I do it this way, I always recommend that you finish off with something positive/constructive to lessen the blow.
As always, when discuss these sorts of matters, it is always best to be communicate face-to-face with the person, of possible, as sometimes things in email/text/phone can get misconstrued and taken out of hand. In fact meetin IRL is probably better than Skype too, as you guarantee that the person can't just abruptly stop communication and you can leverage your body communication skills to lessen the blow.
TLDR: Use the good, bad, good "sandwich" for most people, use the upfront "bad news first" method for those who like it straight and blunt. Oh and try to meet IRL to break the news.
We think you are a very competent person within our group and were impressed how you did X. However while doing it you somehow neglected Y and it had bad consequences Z, and therefore we need to terminate your contract with us. Having said that, I would like to remind you how awesome you are in so many ways and I am confident you will find very soon opportunities that are matching your skill set better than we could.
I find it pretty hypocrite, but I must be of the blunt type.
OTOH, when terminating a contract (the only kind of "firing" I've ever had to do), I point out to the contractor that they did great work, and was well appreciated and they have completed their services well and the skills are no longer needed. Follow up by mentioning that I would recommend them for a new position and they can finish out the week.
Crappy contractor: you're not working out. We have to terminate now.
"Crucial Conversations Tools for Talking When Stakes Are High, Second Edition"
http://www.amazon.com/Crucial-Conversations-Talking-Stakes-E...