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Cost Overrun FAR 52.232-20


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Facts: Contractors have Cost Overruns from time to time. When this occurs the Contractor notifies the CO/KO in writing as required under FAR 52.232-20.   When the written notification includes a statement that Costs will be greater, it also is required to provide a "revised estimate of total cost of performing" the contract.    In this example assume the contract is a CPFF-Completion for simplicity.  A Cost Overrun is a non-fee bearing increase in the cost estimate to perform the contract, in this set of questions. 

Questions: 

1. What extent does the "revised estimate" have to document the overrun?

2. Does this "revised estimate" have to meet the requirements of FAR 15.2, if so when?

3.  Can the revised estimate be just 1 number in the letter and does an amount change anything(Think $100K, $1M, $5M, $100M)? 

4.  What extent does the FAR require a CO/KO to analyze a cost overrun, besides issuing a modification with the funding/cost increase necessary to complete performance?

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@CharterParty Answers:

1. There is no rule in FAR about the documentation of a cost overrun. FAR 52.232-20 does not say. The CO may ask for details.

2. What requirements of FAR 15.2 are you talking about? It does not cover the "requirements" for revised estimates. It's about solicitation and receipt of proposals and information. Did you mean FAR 15.4? If so, it's not of much help either.

 3. It can be just one number. The clause does not require more.

4. FAR does not address CO/KO analysis of a cost overrun. But, presumably, the parties will discuss the matter and the CO will consult with his or her client. The requiring activity (client or "customer") should be actively involved.

The FAR is not a textbook. It is a book of rules. You need a copy of Cost-Reimbursement Contracting, 4th ed., by Cibinic & Nash, a very expensive book, or some other textbook on contract or project management.

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10 hours ago, CharterParty said:

Facts: Contractors have Cost Overruns from time to time. When this occurs the Contractor notifies the CO/KO in writing as required under FAR 52.232-20.   When the written notification includes a statement that Costs will be greater, it also is required to provide a "revised estimate of total cost of performing" the contract.    In this example assume the contract is a CPFF-Completion for simplicity.  A Cost Overrun is a non-fee bearing increase in the cost estimate to perform the contract, in this set of questions. 

Questions: 

1. What extent does the "revised estimate" have to document the overrun?

2. Does this "revised estimate" have to meet the requirements of FAR 15.2, if so when?

3.  Can the revised estimate be just 1 number in the letter and does an amount change anything(Think $100K, $1M, $5M, $100M)? 

4.  What extent does the FAR require a CO/KO to analyze a cost overrun, besides issuing a modification with the funding/cost increase necessary to complete performance?

“Subpart 34.2 - Earned Value Management System

Parent topic:  Part 34 - Major System Acquisition

34.201 Policy.

(a) An Earned Value Management System (EVMS) is required for major acquisitions for development, in accordance with OMB Circular A-11. The Government may also require an EVMS for other acquisitions, in accordance with agency procedures.”**

For Corps of Engineers’ cost reimbursement contracts (construction, service, environmental services, A/E) the contracts will include requirements for the contractor to have and use adequate project controls systems for managing both schedule and costs. It may be a formal or less formal system for earned value management. There will be provisions for government visibility and oversight of the contractors’ management and cost/schedule progress performance. There will generally be requirements for regular EVM reporting and meetings. 

Therefore, questions 1, 3 and 4 for USACE CPFF completion type contracts would, depending the the specific contract requirements, require much more than cursory contractor information as well as government analysis and involvement.

Construction contractors and large Defense Contractors generally use some type of earned value management systems to measure and manage their progress and cost performance, regardless of whether a contract specifies the use of an EVMS and for both FP and CR type contracts.

A well managed contractor with active government oversight involvement should minimize the incidence of surprise notices of overruns…

For DoD there are FAR supplements and (some) agency supplements or other procedures, applicable to CPFF contracts.

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If a CPFF contractor thinks that they don’t need to “document the overrun” (whatever that means) in their estimate to complete and  only need to provide “one number”, they have no business performing cost reimbursement contracts.

If the government can’t or won’t analyze a cost overrun, then they are incompetent and shouldn’t be issuing or administering cost reimbursement contracts. Its a serious breach of trust as stewards of the taxpayers’ money.

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6 hours ago, joel hoffman said:

If the government can’t or won’t analyze a cost overrun, then they are incompetent and shouldn’t be issuing or administering cost reimbursement contracts. Its a serious breach of trust as stewards of the taxpayers’ money.

Tell us more. What should the analysis seek to learn?

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For example, where the overruns are. Can some efforts be reduced or redirected? Can some efforts be eliminated? Is the contractor making its best effort to complete the effort within the budget? Is the effort being well managed? Is performance satisfactory? Does the government want to and can the government simply fund the overrun or should it consider some other action? 

Depending upon the type of work being performed, If the government is actively administering the contract, they should already be aware of cost trends and productivity/performance trends.

The original post asked general questions that appear to be solely based upon the clause at FAR 52.232-20 with no other context.

Your answers to the questions are correct to the extent that they address the direct questions asked.

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Other considerations could include how reliable or realistic is the contractor’s estimate to complete (estimate at completion EAC), what would it cost to terminate for convenience vs. continuing performance, etc.

As Vern said: “… presumably, the parties will discuss the matter and the CO will consult with his or her client. The requiring activity (client or "customer") should be actively involved.”

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One of my pet peeves in this area is the set of indirect rates to be used for forecasting the At-Completion variance from the estimated cost budget when an FPRA is in place. Many government folks expect the contractor to use its FPRA rates; after all, that's what the parties agreed to for estimates of future costs, right?

Not in my opinion. In my view, the contractor should use its current indirect cost estimates--which could be its FPRP rates or something even more current--to project its to-go costs. Often, FPRA rates are decremented as part of negotiations, which renders them (potentially) inaccurate. The At-Completion variance should be as accurately calculated as is feasible.

Since we argue about which set of indirect rates to use, you can safely infer that my clients are encouraged to provide their government customers with as detailed an estimate as they can feasibly provide, because they are asking for more money than planned and it is only reasonable to expect an explanation of what happened and why, as well as a justification for the amount of additional funds now required.

Just throwing "1 number" at the customer is not a winning success strategy, in my experience.

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I like to better understand the realm of rules required vs. the arbitrary preferences of individual organizations and people.  I think we have agreement the FAR does not require anything more than 1 number in the FAR 52.232-20 letter.   The next big question in my mind is best captured by @Vern Edwards

On 5/18/2023 at 5:49 AM, Vern Edwards said:

Tell us more. What should the analysis seek to learn?

Assume a KO/CO and associated technical "customer" have been actively managing and are aware of the overrun. What benefit does the Government receive in either demanding a "proposal" be generated and any subsequent "analysis".  @joel hoffman 

On 5/18/2023 at 8:43 AM, joel hoffman said:

Other considerations could include how reliable or realistic is the contractor’s estimate to complete (estimate at completion EAC), what would it cost to terminate for convenience vs. continuing performance, etc.

As Vern said: “… presumably, the parties will discuss the matter and the CO will consult with his or her client. The requiring activity (client or "customer") should be actively involved.”

The counter is the overrun, both parties failed to estimate the EAC. 

Do we work under the premises that this time is different?  Instead of acknowledging the shared risk and active management by granting the overrun request. 

I am drawn to FAR 15.403-1(b)(Assuming base award most likely utilized FAR 15), "The CO shall not require certified cost or pricing data to support any action(Contracts, subcontracts, or modifications)(but may require data other than certified cost or pricing as defined in FAR 2.101 to support a determination of a fair and reasonable price or cost realism)" to help tamp down agency requests.  Again, I don't see the value in anything like a detailed 15.404 analysis.  I have yet to be convinced a Fair and Reasonable determination is a necessary function of any MTF/PNM/BCM associated with the modification increasing the ceiling and providing funds.  @here_2_help I post in the hopes it reduces the arbitrary preferences of the agency.  In many cases maybe 1 number should be sufficient, we have to assume the contract is being managed the alternative is a whole different issue.  I am more concerned about the Agency overreach and associated costs both to industry in "proposal" preparation and government in "analysis" documentation generation. 

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47 minutes ago, CharterParty said:

I think we have agreement the FAR does not require anything more than 1 number in the FAR 52.232-20 letter.   

The law of contracts requires both parties to act in good faith, and refusal to cooperate within reason during overrun analysis might be considered a failure to so act.

Assume a fully-funded cost-reimbursement contract.

If the contractor notifies the CO that there will be an overrun, the first question for the agency to answer for itself is whether to fund the overrun and require the contractor to continue to perform or decline to do so and terminate the contract.

In order to make a decision the agency and contractor should, at the least, determine (1) the estimated cost to complete and the realism of the estimate, (2) the cause(s) of the overrun (faulty initial estimate or problems during contract performance), (3) whether the causes(s) were transient and, if so, the likelihood of recurrence, or whether they are chronic, (4) the chance(s) of effective corrective action, (5) the risks of future overruns of various degrees of magnitude, (6) the availability of additional funding, and (7) the impact of termination on the larger program and on agency mission.

There may also be socio-economic and political implications, domestic and international.

It's more complicated if the contract is incrementally funded, but the basic idea is the same.

It is in the interest of both parties to cooperate during the analysis, and any refusal by the contractor to cooperate fully might be an indication of failure to make a "best effort."

The government's demands for information should be reasonable, keeping in mind that the contractor will be entitled to reimbursement of the costs of compliance. The contractor should promptly comply with reasonable requests for information.

The contractor's estimate is not a "proposal" (offer), and estimates are not certified cost or pricing data. But the contractor should willingly explain the bases for its estimate and share the information on which it is based and its assumptions and calculations.

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13 minutes ago, Vern Edwards said:

The law of contracts requires both parties to act in good faith, and refusal to cooperate within reason during overrun analysis might be considered a failure to so act.

Assume a fully-funded cost-reimbursement contract.

If the contractor notifies the CO that there will be an overrun, the first question for the agency to answer for itself is whether to fund the overrun and require the contractor to continue to perform or decline to do so and terminate the contract.

In order to make a decision the agency and contractor should, at the least, determine (1) the estimated cost to complete and the realism of the estimate, (2) the cause(s) of the overrun (faulty initial estimate or problems during contract performance), (3) whether the causes(s) were transient and, if so, the likelihood of recurrence, or whether they are chronic, (4) the chance(s) of effective corrective action, (5) the risks of future overruns of various degrees of magnitude, (6) the availability of additional funding, and (7) the impact of termination on the larger program and on agency mission.

There may also be socio-economic and political implications, domestic and international.

It's more complicated if the contract is incrementally funded, but the basic idea is the same.

It is in the interest of both parties to cooperate during the analysis, and any refusal by the contractor to cooperate fully might be an indication of failure to make a "best effort."

The government's demands for information should be reasonable, keeping in mind that the contractor will be entitled to reimbursement of the costs of compliance. The contractor should promptly comply with reasonable requests for information.

The contractor's estimate is not a "proposal" (offer), and estimates are not certified cost or pricing data. But the contractor should willingly explain the bases for its estimate and share the information on which it is based and its assumptions and calculations.

Exactly! 

 

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I imagine that the contracting officer would like to establish confidence in the contractor's number. If the contractor is asking for more funds today, how does the contracting officer know the contractor won't be back next week, asking for even more funds to complete the work?

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23 hours ago, here_2_help said:

I imagine that the contracting officer would like to establish confidence in the contractor's number. If the contractor is asking for more funds today, how does the contracting officer know the contractor won't be back next week, asking for even more funds to complete the work?

I suspect that in many programs COs fund an overrun knowing with near certainty that the contractor will be back for more funds, they're just not sure exactly when and how much more they will need.

I think we need to be frank about some things. First, in theory we enter into cost-reimbursement contracts because we're cannot predict the cost  of contract performance with confidence. In theory, from day one there is at least a 50-50 chance of an overrun. We just can't predict how much the overrun will be.

In some cases the parties enter into the contract knowing full well that there is no chance that final incurred cost will be equal to or less than estimated cost. They have no idea what the final incurred cost will be. In large programs, the choice of contract type is political. In many cases the notice of an overrun is pro forma—everyone knew it was coming and nobody knows how much the incurred cost will be in the end.

In certain respects, "cost-realism" is a nonsense idea, it's main purpose being to hide reality from the public. In any case, with some exceptions, history shows that the government is no good at cost-realism analysis. It's another pro forma measure to keep the GAO happy.

What most COs believe and think they know about contract pricing arrangements is wrong, based on nonsense and naiveté.

 

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Agree with Vern that “in large programs COs know with near certainty that the contractor will be back for more funds, they're just not sure exactly when and how much more they will need.”

In large programs, there should be fairly sophisticated contractor project controls systems/ personnel and earned value data available, although the formal reporting requirements are not real time.

If the government side has an active project controls system/team, they should be able to see and be familiar with the trends and data near real time, if there is a partnering relationship between the parties.

We were fortunate to have all of those those on most of our CAT 1 , Chemical Weapons Demilitarization/Disposal Systems contracts.

I had several TVA project controls experts and field engineers, all with Nuclear and Fossil Fuel Plant construction experience working for me. Also had some crackerjack internal Corps employees on my team and in the Resident Offices. At times, several of them were embedded in the contractors’ field offices with their project controls and production supervision staff for both oversight and for liaison purposes between the Contractors and our Resident Offices..

The former Washington Group International was particularly good to work with on their contracts at the time. The Bechtel offices were also cooperative. 

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8 minutes ago, joel hoffman said:

In large programs, there should be fairly sophisticated contractor project controls systems/ personnel and earned value data available...

See FAR Subpart 34.2.

There has long been controversy about the "value" of earned value management. Conceptually, they make sense. But, as a practical matter, they are subject to manipulation by either party and for several reasons. They look good on paper, but do they work? Most of its most avid proponents seem to be EV consultants, EV teachers, EV software merchants, and members of Congress.

See, e.g.: "Enough Already, There is No "Value" in Earned Value Management," which is about the use of EV systems in agile development projects.

https://vitalitychicago.com/blog/enough-already-there-is-no-value-in-earned-value-management/

See also:

https://www.parallelprojecttraining.com/blog/earned-value-management-is-it-worth-the-effort-3/

https://smartprojex.com/rethink-earned-value-management/

These kinds of systems are never better than the organizations and people that use them.

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I started to post something similar about the need for more judicious use of project management tools and techniques, good communication processes, and better collaboration between PMs, COs and contractors.  But I saw Vern’s post and thought more about the realities.  Program offices and agency senior management often have a good idea of the ultimate cost but go with lower estimates knowing the project won’t be authorized or funded with their true amounts.  Offerors also have a good idea that solicitation information on which they base their proposals are low but avoid eliminating themselves from their competition by bringing up what they really see.  It turns into a game of “wink, wink” between the parties and the old “we will handle those adjustments later.”

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I started my career in what is now called "EVMS" but which was then called "C/SCSC" (aka "Two-and-a-half Chicken Shits"). Using EVM and related tools to predict an at-completion variance is not a bad idea, though the at-completion value is never as precise as advocates want you to believe it is.

But all the variance analysis a formal EVM system requires is simply a big waste of time. As somebody once told me, it's like steering a boat by focusing on the wake.

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17 hours ago, here_2_help said:

I started my career in what is now called "EVMS" but which was then called "C/SCSC" (aka "Two-and-a-half Chicken Shits"). Using EVM and related tools to predict an at-completion variance is not a bad idea, though the at-completion value is never as precise as advocates want you to believe it is.

But all the variance analysis a formal EVM system requires is simply a big waste of time. As somebody once told me, **it's like steering a boat by focusing on the wake.

I agree with both of your paragraphs. But the bigger construction companies I’ve worked on projects with use the basic forms of earned value management to track schedule activity costs and their unit costs and productivity, even on fixed price contracts. The construction phases of several of our Chem Demil Systems contracts were FFP and they tracked earned value against their budget estimates. 

If one ever wonders where Means and other estimating sources get their information, it’s through the budgeting and cost/resources tracking systems.

I agree that the government mandated forms of reporting, reports etc. aren’t really valuable as they simply look behind. The reports are based upon data that is at least 1-2 months old. By the time it is reviewed and actionable, it’s another several weeks.

The most effective way that earned value and productivity data can be managed on construction projects is on a weekly or bi-weekly basis.

**P.S. My wife can “steer” a sailboat upwind or downwind, while standing in front of the ship’s wheel, facing only to the stern, focusing on the wake, the following seas and the direction of the wind on the water. (For about seven miles for over an hour). Of course, that was in real time.

It’s hard to make comparisons with something “someone” made who may not know what they are talking about… 🤠(By the way, Libby says hello, N !)

She’s got the “touch and feel”. I trust her with my life and that of the crew driving downwind in a race or a storm, based upon numerous experiences - in races and storms.

Here is a sample of her driving our 36’ Catalina sailboat, “St. Somewhere”, under bare poles, downwind 9 NM in 20 minutes in a deadly 70-80 knot storm. Six sailors died that day and 10 sailboats capsized and sank.

The longer film version was featured on all the major News Networks, including BBC, in April 2015. (Don’t worry about copyright violations. The film is copyrighted by our son)

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On 5/19/2023 at 4:04 PM, Vern Edwards said:

I should add that one response to an overrun might be to modify or partially terminate the contract, in which case the contractor might be required to submit a proposal and certified cost or pricing data. 

In addition to the OP’s concerns about the level of detail that the government may demand, If the required contract action is solely to increase the cost limitation or funds limitation and to provide additional funds due solely to an overrun and revised “estimate at completion” (revised estimate of total cost), it doesn’t constitute a “change” under the Clause at 52.243-2, “Changes Cost Reimbursement”. So, I don’t think that a formal proposal or certified cost or pricing is required in that case.

I found my 3rd Edition of Cibinic and Nash’s Cost-Reimbursement Contracting this morning. I read through Chapter II, Contract Administration, I. “Control of Funding” (including the LOC and LOF clauses) as well as II. “Changes and Technical Direction”.  and other references in the book to “Changes”. That seems to be in agreement  with my thoughts concerning no requirement for formal proposal or certified C&P data (Where no change to the requirements, no Termination or no government fault is involved).

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I have long wondered how people ever got the guts to venture far from shore in sailing vessels in stormy weather. I have jumped out of airplanes at night carrying 80 lbs of stuff and thought it was a blast, but the idea of being on the boat in that video makes my knees knock.

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I will add that the Nash and Cibinic C-R Contracting book states that the Nature of the overrun notice under this chapter has been frequently litigated.

It also states that “[the] Government is not required to make computations or analyses of data submitted by the contractor to determine whether an overrun would occur.”

Extensive coverage of the topic of the notices).

Also,  discussion on the necessity for the contractor to have a Budget and Accounting System and to maintain accurate records records of incurred costs, present commitments, and current estimates of the cost at completion, in order to comply with the notice requirements and avoid incurring an overrun.

 

 

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57 minutes ago, Vern Edwards said:

I have long wondered how people ever got the guts to venture far from shore in sailing vessels in stormy weather. I have jumped out of airplanes at night carrying 80 lbs of stuff and thought it was a blast, but the idea of being on the boat in that video makes my knees knock.

It made my knees knock, too! Sorry for the length of my following synopsis…

In the film, I was holding one of my 80 year old crew members closely so he wouldn’t get hypothermia and shock from the cold, wet rain. I’m the bald one at the left of the video. Lost my hat and probably more hair that day.

Libby was remarkably calm at the helm and determined,  because we both had and were prayed up during the storm. Our son filmed the entire storm ride on his GoPro mounted on his head.

Nobody, including the meteorologist who briefed us the night before knew more than to possibly expect typical  summer pattern of an afternoon rainstorm… He was caught in it, too!

I remember a fellow asking him detailed questions about the weather because he had never sailed before and was going to crew on a boat in the race. The meteorologist tried to soothe his fears and said that the bad weather would likely pass above us in that lower part of Mobile Bay and move north-westerly.

That person drowned during the race. It haunts me to this day…

Another sailor acquaintance drowned after jumping overboard, while tied up under the high Bridge across the Intracoastal Waterway, to save a teenager that was swept overboard. They both drowned. They never found my acquaintance’s body.

We had just finished the race among the first fleet leaders and doused our sails to motor back up the Bay. We checked the radar app when we saw the wall cloud approaching from the west. Radar showed it moving NE and we could avoid it by turning due east - so we did that.

Unfortunately, the radar page was 15 minutes behind real-time as we turned east. Immediately, the wind built up in 10 mph increments on our digital wind indicator within a minute or two to 60-80 knots.

We would have to cross the Mobile Bay Ship Channel in very low visibility. Libby and I were worried about striking channel markers or avoiding ship traffic. She couldn’t turn the boat- as we surfed downwind at almost 30 knots over the ground. The knot meter was pegged at 12 knots over the water.

We missed the channel markers and Gas rigs in the Bay but crossed below a Huge cargo ship steaming down the channel only by 3-4 minutes. It sounded its horn before we could see it as we crossed!!

A sailboat suddenly appeared and crossed us southbound under full sail about 50 yards in front of us. They couldn’t take down their sails.. It was heeled far over and soon disappeared again in the rain. We later learned that it capsized a few moments after crossing us but with no injuries or deaths.

I was worried that we were going to run out of deep water on the East side of the Bay. After about 20 minutes and nine NMs surfing downwind, we neared the InTracoastal Waterway channel  and shallow water south of that. But the wind subsided enough to allow us to turn back to the west. It took us 1 1/2 hours to motor back to where we first turned east.

We approached a Catalina 22 anchored with blown out sails and an outboard motor that wouldn’t start. A husband , wife and pre-teen daughter had been stranded there with only their anchor holding the boat. We towed them five or six miles back to our harbor, next to our slip.

God was with us all the way that day!! 🙏

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6 hours ago, joel hoffman said:

I have jumped out of airplanes at night carrying 80 lbs of stuff and thought it was a blast

My first parachute jumps were from a sport parachute Club outside of Xenia, Ohio, near Wright Patterson, AFB in early 1972. A fellow USAFA graduate and I were 2Lt’s, TDY, attending a class at WPAB. My friend was a parachutist and talked me into taking a 2-3 hour lesson, then trying to get in 5 static line jumps, then a free fall jump on a weekend.

I was apparently the test “wind dummy” on the Cessna 182 to stand on the door step, grasping the wing strut and letting go when the jumpmaster thumped me on my butt at about 2400 altitude. Two other, experienced jumpers would then go up high for a free fall jump.

I did what I was told even though standing on one foot, holding onto the strut in the wind terrified me. He said he would kick me off the step if I hesitated!  I let go…

But instead of arching my back, looking up and counting “1,001-1,002-1,003”, I looked straight down, which caused me to fall feet first, straight down. I thought the chute wasn’t going to open, so began screaming, kicking and flailing my arms!  It “finally” opened and  YES, I was alive and it was then marvelous! The silence up there was awesome.

I landed in a cornfield next to the grass airstrip. I walk-ran back ASAP to catch the next flight. I asked the jump master if there was a delay in the chute opening. He laughed and said that the chute opened immediately!!! He apologized for making me jump from the wrong location.

Made three more jumps before dark but it snowed the next day. Couldn’t go back until two years later. Made three more jumps but was snowed out again.  Glorious! 🤪 but never was able to get a free fall jump.

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I’m also a sailor but got wiser with age.  I switched to power with all the amenities of home.  Storms?  Watch the GPS screen and hit the throttles.  Safe in port watching the storm after cracking open a beer 😄

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