Foundations is a button on the Menu from which you can build and demolish Buildings. A building requires an entrance which can either be a door or a demolished wall. Placing foundations on top of an existing one will cause them to merge and demolish the wall(s) between them which is useful for expansion. Placing foundations one square next to an existing one, will keep the wall(s) intact.
Buildings cannot be created by simply placing walls and any type of flooring. Building a foundation is required in order for it to be classified as "Indoors."