Is it normal for the kraft paper to face the interior?

Your boss is right on this one, though it's a common mistake because basement moisture can be counterintuitive. The main issue is that 2-inch rigid foam is alredy acting as a **vapor barrier**. When you put the paper facing toward that foam, you're creating a moisture sandwich where any condensation that gets into the wall cavity is trapped between two impermeable layers with nowhere to dry out.

In almost every climate except the extreme humid south, the vapor retarder belongs on the warm-in-winter side of the wall. That means the paper should be facing you—the conditioned room—not the foundation. By tucking it toward the foam, you've put the paper on the cold side of the fiberglass. Moisture from the room will migrate through the drywall, pass through the fiberglass, and hit that paper, which is sitting against the cold foam. Then it condenses and you've got a perfect environment for mold.

Actually, the best way to handle this specific setup is to use **unfaced insulation**. Since the rigid foam is already glued and sealed to the blocks, it's already handling the moisture coming from the exterior. If you have to use the batts you already bought, you realy need to flip them so the paper is against the drywall. It’s a pain to redo, but leaving it as is almost guarantees a musty smell or rot in five to ten years when that paper starts feeding spores. And don't listen to the guys saying it doesn't matter or that the paper goes toward the source of moisture. That logic only applies to the exterior house wrap, not interior vapor retarders. If you flip them, just make sure you don't over-compress the edges when you staple the flanges. You want the fiberglass to stay as lofted as possible to keep its R-value.

I ran into this exact mess on my first basement job. I ended up just peeling the paper off the batts entirely becasue flipping them was a nightmare with the electrical we already ran. If you leave that paper against the foam, you’re gonna find black spots in three years—I saw it firsthand when I helped a neighbor gut his finished basement. Just pull the paper off or take a utility knife and slash it every few inches if you’re stuck with those batts. It’s way better than letting it rot back there.

I'm still trying to wrap my head around this whole 'warm side' thing. If I end up flipping the batts like you suggested, shold I be stapling the paper flanges to the front of the studs or the inside? I’ve seen people do both and I honestly don't know if it makes a difference for the drywall sitting flat against the wood. Also, what happens if I run a big dehumidifier down there? Does that change where the moisture wants to go, or is the 'warm side' rule always the same regardless of what's running? Sorry if these are dumb questions, I'm just super new to the science behind this.

Honestly, stop fighting with that paper. If you want to do it right and never worry about it again, just return those batts and get Rockwool Comfortbatt. It’s stone wool, so it doesn't need a vapor retarder like paper in a basement. It acutally breathes and won't mold even if it gets damp.

I switched to using the 2x4 Comfortbatt for all my basement jobs beacuse you just friction fit it and it stays put. It’s way denser than the pink stuff and handles the moisture issues much better than trying to guess wich way the paper goes. It's a lifesaver for foundation walls.

So I took the advice about the 'moisture sandwich' and started flipping the batts. My boss was defintely right, but peeling that paper off around the outlets is a total nightmare. I'm thinking about switching to Rockwool for the rest of the wall like someone mentioned. If I go that route, do I still need to staple poly over the studs before hanging board?