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UPDATE 1-U.S. Navy destroyer cost surges 86.4 pct

 * Unit cost increase expected due to quantity cut
 * Gates sees ship surviving live-or-die review
 (Adds details of cost increase, comments by U.S. Defense
secretary) 
 WASHINGTON, Feb 3 (Reuters) - The U.S. Navy's DDG-1000
destroyer program has breached congressional cost thresholds
due to last year's decision to truncate the program at three
ships, Defense Secretary Robert Gates said.
 But Gates said the cost increase was not due to any
performance issues, and the Pentagon planned to continue the
program despite a mandatory review that could lead to its
termination under the Nunn-McCurdy law.
 The Navy told lawmakers in a letter dated Feb. 1 that the
ship's program acquisition unit costs had increased by 86.4
percent, breaching the cost thresholds, but emphasized the
surge was due solely to the reduced quantity.
 "Recognizing that this breach is driven by a quantity
change, and not program performance, the Navy intends to
continue to execute appropriate near-term contract actions
necessary to ensure efficient program execution," Navy
Undersecretary Robert Work said in the memo, a copy of which
was obtained by Reuters.
 Gates said the truncated destroyer program was basically on
track and would continue.
 "The program is going to breach Nunn-McCurdy ... not
because of performance issues, but because of the reduction in
the buy," Gates told the House Armed Services Committee. "Our
plan is to continue to go forward with it."
 The Navy initially planned to buy 10 of the new destroyers,
but later reduced the number to seven. Then last year, it
decided to stop production at just three ships and build more
of its older-model DDG-51 destroyers.
 The DDG-1000 ships were designed by Northrop Grumman Corp
NOC.N, but General Dynamics Corp GD.N will finish the work
on the three ships under a work swap agreed with the Navy.
 Work told lawmakers the average unit cost increase on the
ships was less than 25 percent, compared with the program's
original baseline estimate in November 2005, which was based on
the Navy's original plan to buy 10 ships. The memo did not
detail the actual cost of the new ships.
 Former chief arms buyer John Young had predicted a year ago
that the cost of each of the destroyers could reach $5.96
billion, nearly double the expected price tag of $3.3 billion.
 Young avoided breaching the congressional cost threshold by
adding a number of "future surface combatants" to the program.
 When the Pentagon decided to scrap plans for a new cruiser
as part of its fiscal 2011 budget proposal, those new ships had
to be removed from the DDG-1000 program, triggering the
long-anticipated cost increase in each of the remaining three
ships.
 Any increase in the unit cost of a weapons system of more
than 15 percent above its baseline cost triggers a mandatory
live-or-die review under the Nunn-McCurdy law, forcing the
Pentagon to review if the program is essential to national
security and meets several other tests.
 (Reporting by Andrea Shalal-Esa, editing by Matthew Lewis)


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