This response is based on the information provided.  We suggest you discuss with your contracting team, program manager and/or legal department as appropriate. 

We do not know from the background what the contractor is "modifying".  As the contractor has been conducting business in this manner for a number of accounting periods, it could be that this practice is captured in its disclosure statement or established cost accounting practices.  The appropriate DCMA and then DCAA units with cognizance over this contractor will be able to tell you if the contractor is operating within generally accepted accounting practices or must make adjustments to the way it determines its G&A allocation base.