We are building an addition that the designer forgot to consider elevations in the drawings. The builder thankfully caught the issue as we were excavating and discussed our options. The new addition is at a higher elevation than the existing house and the lot did not allow for scraping down far enough to be at the same level so we had 2 choices to adapt the plans on the fly, either create a split level home to step up into the new addition or drop the floors by hanging them inside the foundation walls. There was no logical place for the step up inside the house so we opted to hang the floors to allow the floors on the first floor to be at the same elevation throughout the entire house (old and new). By doing this, we have created an insulation gap between grade and where the siding starts being attached to the studs. Below grade is the crawl with the insulated interior walls. This gap is 10 inches and will literally have sheet rock attached to the concrete. I don't fully understand the thermal and moisture consequences of this.

We have a poured foundation already and are ready to back fill but are considering insulation options. We are going to do a conditioned crawl space. This is an an addition to a 70 year old house with an existing crawl space so we had to stick with continuing the crawl rather than look at cost-prohibitive options such as a basement or slab. The existing crawl is semi-vented but will all be properly sealed up. We have radon mitigation already and plastic flooring but will be adding rigid foam insulation to the new foundation walls on the interior.

The builder would like to run rigid foam insulation around the exterior as well from the ground up to the bottom of the siding and then cover it with some kind of finish BUT this will cause a bump out of 2 inches beyond the siding that will still need to somehow be finished, probably with metal. It is common to do a "wainscoat" of corrugate around houses in our area but they have never appealed to me. This choice would be the likely one if we end up insulating the exterior but I have never seen the corrugate "bump out" beyond the siding. It is usually flush with the siding or recessed because it is against the foundation.

My question is, 1.) do we really need to worry about that 10 inches that does not have insulation if the rest of the house is insulated? We are zone 6. North side of house will have a couple feet of snow against it for about 3 months every winter. Obviously there is a major thermal break happening here but if the floors are warm (because of the conditioned crawl) and the heat is flowing, will we even notice? Are there any moisture concerns with the concrete and drywall together like that?

2.) If we have to do it, are there any other ways to insulate successfully with a thinner material so that it lies flush with the siding?

3.) We have already had termites once and I hear that the foam is a good place for termites to live so are we just asking for termites to head our way. We could leave a reveal on the exterior and interior for inspection but on the exterior that would just look weird and we would defeat the point of the rigid foam if we left 2 inches exposed. I do want to ask builder to use a termite shield and have read about a product called protectowrap that keeps sill plates dry AND free of termites.

We had decided on lap smart board siding but will consider stucco if it creates a more seamless look somehow.