* 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, but General Dynamics Corp 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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