Start with any good news there might be. For example, "so, Mr. Client, we tested the prototype and it performed as we expected. Now our challenge seems to be getting that same level of performance up to the factor of safety as outlined in your specifications. We have reviewed the data and believe this will require....and estimate the cost to be around..."
Do not say, "Mr. Client, I have bad news. The prototype blew up into tiny shards of shrapnel at 98% capacity, well short of your specification of 130%. It's gonna cost a butt load more to get it to perform at that level and I have no idea how much time it might take."
"If you are going to walk on thin ice, you might as well dance!"