David Bicknell suggests that the more quickly bad news is given, the better chance there is that a project eventually finds success. Unfortunately, it's not in our human nature to give bad news fast. Everyone wants to watch their backs. If they're particularly associated with a project, they don't want to be seen as the one that delivers the bad news—so they wait for someone else to deliver it. So many projects fail because bad news is stifled. You need to allow and encourage bad news to come out quickly. Never blame the messenger—the truth is the truth.
Ken A added: I could not agree more. When you quickly report any bad news it builds trust in you, that there is nothing "in hiding" on your project. Having been in management as well as project management, that trust in the person more in the trenches is extremely beneficial. You do not have your superiors micro-managing or watching over your back. And the same goes for your customers, they appreciate it too and that trust level is just as or more critical with the customers of your project.