What I prefer to do is use the infusion equation instead of the strike water equation. Vi = (T2-T1)(0.2G+Wm) / Aw-T2 Where Vi = The infusion volume, T1 = starting temp of mash, T2 = target temp, G = Total grain in lbs, , Wm = the total amount of water in the mash in quarts, Aw = Actual temperature of infusion water. Normally this equation is used to calculate infusions. But, you can also use it to calculate your strike temp and account for heat loss by solving for Aw. To solve for Aw, the equation looks like this Aw = [(T2-T1 )(0.2*G + Wm) / Vi] +T2. In this case, T1 = your grain temp, Vi = your strike water volume in quarts and Wm will be used to account for your heat loss. Since the mash doesn't have any water in it yet, Wm would normally be zero in this case. But, you can convert your heat loss to an equivalent volume of water in quarts and use that value for Wm. For more information on equivalent volume of water and how to calculate it follow the link http://www.haandbryg.dk/mashcalc.html#heattun
I don't know what your grain temp was, but I'll walk you through this.
We'll assume 70F for your grain temp. I ran your numbers from above and got an equivalent volume of water of ~5.2 quarts. You used 3.5 gallons, so that's 14 quarts.
According to the data you provided, we can calcuate what your stirke water temperature should have been to achieve 154.
T1 = 70, T2 = 154, G = 10.5 lbs, Wm = 5.2 quarts, Vi = 14 quarts
Aw = [(154-70)(0.2 * 10.5 + 5.2) / 14] + 154
Aw = 197.8 F So, according to what you've told us, your stirke water temperauture should have been ~ 198F.
198 seems pretty high for a strike temp, so Fuzze may be right, you might have a bad thermometer. Once you are sure you are getting accurate temperature readings, you should be able to dail this in real quick.