The FMR is clear on how to fund modifications and/or improvements.  It really goes to the intent of the modification.  If you are increasing the capability of the system involved, you would use RDT&E funds to do the design, test and integration of the new capability.  If you are not increasing capability, yet require DT&E or IOT&E, you would also use RDT&E funds for the design, test and integration.  If you are not increasing capability and do not require DT&E or IOT&E, then you would use Procurement funds for design, test and integration if the system is still in production.  If the system is no longer in production, you would use O&M funds for the design, test and integration.  Regardless of what you use for the design activity, you would use Procurement funds to buy any material and to do the installation of the new capability.  I will submit to you via direct e-mail a flow chart that DAU uses to make such determinations.  It encompasses what you will find in DoD FMR Volume 2A, Chapter 1, 010213.C.7.