The furring strips on Dow Wallmate secure the XPS to the wall while providing a convenient point of attachment for the drywall. There is no space between the drywall and foam. For video, scroll down to "interior basement and crawlspace."

I've never read about not allowing space between foam insulation and fireproofing. And disallowing foamboard between the studs really takes the cake for irrationality!

Heat loss from uninsulated basement walls can account for up to one-third of total heating costs, so I would definitely not go naked, so to speak.

Here is a link that might be useful: Basement Insulation Systems

A high efficiency furnace doesn't do much good if your house is low efficiency otherwise. You might as well just open a window. The best practice seems to be to glue foam to the walls and seal and tape all joints to create an air barrier. Then frame walls in front to run your plumbing and electrical in and hang your drywall on. This has become the preferred method for insulating basements. Ask the inspector to show you the code citation. Some make poor interpretations of the code, some are just incompetent. More than likely your guy is just misunderstanding something in the code language. Show him this article and the details in fig. 15: http://www.eere.energy.gov/buildings/building_america/pdfs/db/35017.pdf

Thanks worthy and nmccarty for your comments. I'm familiar with Wallmate but did not want to use furring strips.

I think they are taking the fire code requirement of covering insulation with something fire-resistant such as drywall very literally as "covering right on the XPS". I'll see if they'll at least let me put it in between studs - otherwise, how is this acceptable for fiberglass insulation?

I have a feeling it will be difficult to convince them of the preferred way - my township is notorious for being difficult. And I've talked to more than a dozen contractors who did not know anything about applying XPS to basement walls as a preferred practice, so this information is just slow to get out.

I'll let you know what I end up with.

In my opinion, putting XPS between the studs defeats the whole purpose of using it. By putting it directly on the concrete behind a stud wall it creates an air barrier that prevents any humid interior air from condensing on the cool concrete. It also separates the wood from the concrete thus preventing it from wicking moisture from the walls and reducing the risk of mold. By putting it between the studs you create a lot of extra work in taping everything together to create the air barrier and you are not keeping the wood off the walls.

In my opinion, putting XPS between the studs defeats the whole purpose of using it. Agreed.

If quiet respectful discussions with your Code officials, as mmccarty suggests, is still fruitless, you could consider using Membrain, a vapour retarder that changes permeability depending on conditions.

Here is a link that might be useful: Membrain

putting XPS between the studs defeats the whole purpose of using it.

In addition to XPS or closed cell spray foam on the foundation walls, it is quite effective.

Here is a link that might be useful: Membrain

A router makes nice grooves in XPS.
Probably not what you want to do, but I put on one 2" layer of XPS with firring strips, put some grooves for wires, and then I glued on another 2" layer of XPS with grooves I put in with a dado blade to cover the firring strips. Haven't found time to put drywall over it yet. It's amazing how solid it is: you can bounce into it with no worries.

HD here in PA sells slotted 1.5" XPS. They are 2 x 8 sheets slotted so that when two panels are put together, the slot is the perfect size for a fur strip. You may then frame in front of this of adhere your drywall right to the fur strips...that make for some difficulty with outlets though but I used this method for in my closets.

Whatever insulation is employed, the inspector is going to ensure that the fire blocking requirement is met and that there are no 'chimneys' or cavities within the wall system which could funnel smoke & fire upwards. I haven't had any problems in 17 finished basement projects with traditional 2x4 framing with kraft faced fiberglass insulation. Absolutely no to unfaced fiberglass with polyethylene vapor barrier (ala - most new home builders) which as we know, traps moisture. The kraft faced batts allow controlled moisture diffusion, don't trap moisture and are an economical solution. I would not build a basement wall without framing - need space for electrical, plumbing, low voltage wiring, etc.