Abstract Background Early care and education (ECE) settings play an important role in shaping the nutrition and physical activity habits of young children. Increasing research attention is being directed toward family child care homes (FCCHs) specifically. However, existing measures of child care nutrition and physical activity environments are limited in that they have been created for use with center-based programs and require modification for studies involving FCCHs. This paper describes the modification of the Environment and Policy Assessment and Observation (EPAO) for use in FCCHs. Methods The EPAO underwent a through modification process that incorporated an updated format for the data collection instrument, assessment of emerging best practices, tailoring to the FCCH environment, and creation of a new scoring rubric. The new instrument was implemented as part of a larger randomized control trial. To assess inter-rater reliability, observations on 61 different days were performed independently by two data collectors. To assess construct validity, associations between EPAO scores and measures of children’s dietary intake (Healthy Eating Index (HEI) score) and physical activity (accelerometer-measured minutes per hour of moderate to vigorous physical activity, MVPA) were examined. Results The modified EPAO assesses 38 nutrition and 27 physical activity best practices, which can be summarized into 7 nutrition-related and 10 physical activity-related environmental sub- scores as well as overall nutrition and overall physical activity scores. There was generally good agreement between data collectors (ICC > 0.60). Reliability was slightly lower for feeding practices and physical activity education and professional development (ICC = 0.56 and 0.22, respectively). Child HEI was significantly correlated with the overall nutrition score (r = 0.23), foods provided (r = 0.28), beverages provided (r = 0.15), nutrition education and professional development (r = 0.21), and nutrition policy (r = 0.18). Child MVPA was significantly associated with overall time provided for activity (r = 0.18) and outdoor playtime (r = 0.20). There was also an unexpected negative association between child MVPA and screen time (−0.16) and screen time practices (r = −0.21). Conclusions The EPAO for the FCCH instrument is a useful tool for researchers working with this unique type of ECE setting. It has undergone rigorous development and testing and appears to have good psychometric properties. Trial registration NCT01814215 , March 15, 2013.