This list of ways to be good at giving bad news translates well to the task of giving bad grades.

One thing I always do in my undergraduate writing classes is to encourage them to argue their way to a better grade -- and lay down the ground rules for what constitutes a good argument. It gives students an option that doesn't involve telling me how hard they worked or assuming that I am just punitive. And occasionally these arguments are convincing and I'll budge on the grade.