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In Colorado, the building code asks for a fire block when finishing a basement. I know this goes against the out walls (foundation). I've seen 2x4 and OSB used: which is better? And how does the OSB get installed?

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OSB would be easier and faster, it gets installed BEFORE the top plate goes up. If you plan to use 2X4 framing set 1" away from the wall or if you follow the detail provided in another post, you can still use it as fireblocking.

When you layout for your top plate and chalk your line for setting the top plate by, before you do, measure over to sill plate that the joists set on for the dimension to rip the OSB. I would suggest to rip the OSB a little shy of the chalk line. that way you will always have it as a reference. My carpenters had ripped the plywood wide enough to cover the line to supposedly follow it but when the wall was finished framed it had a 1/4" bow in it.

Set the plywood, then the top plate, and build the rest of the wall.

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My guess is that your basement is not fully below grade. Meaning you only need to insulate the area that is above grade - can maybe dip a foot below. I frame - add in 2x4 crosses a little below grade. Stuff Roxul above top plate and in the "square" I have created below - I make sure it is stuffed so I make the piece a little too big for opening. Building inspectors have been very happy with this in my area. It is cheap, you are using usually left-overs for your crosses, you aren't overinsulating, and the is plenty of breathing room for the outside walls.

Also if you have to make electrical or plumbing holes in top plates my building inspectors prefer Roxul stuffing over any sort of foam (actually they won't pass this). This all differs by municipality so talk to your inspector.

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