Actually, it's surprisingly straightforward, and as it happens, I too have to cancel a project I'm involved with because someone in my own organization stepped forward to take on the job after previously saying she was too busy.

Here are the basic steps:

1. Log in to My Elance or click My Elance if you are already logged in
2. Click on Buying Activity
3. Click the your project name
4. Locate the Bidding Control buttons
5. If the project is still active, you'll want to click the "End Bidding" button. You will be asked to enter a reason for canceling the project, so that we can provide some feedback to the bidders.
6. Next, click the "Cancel Project" button. You will be asked to enter a reason for canceling the project, so that we can provide some feedback to the bidders.

The Bidding Control buttons are a bit hard to find in their busy interface, the area on the top right of the project information page looks like this:

It's the "Cancel Project" button you want, which takes you to a small box where you can explain what happened:

Type in your reason, click "Submit", and you're home free.