We are setting up our first coop today. Our plan is to use sand and DE for the bottom of the coop but what should we use in the nesting boxes? I have pine shavings from the brooder but wasn't sure if I should use that or maybe hay???
You can use hay, straw, wood shavings, or some other things. Different people have personal preferences but it really does not matter which you use. I find that with any of them, if the lip on your nest box is not high enough (I use a 5" to 6" lip) they can and usually will scratch any of them out. Eggs too if the lip is not high enough.
Also, do I need block off the nesting boxes at first? I read that somewhere but wasn't sure why.
You can but don't necessarily have to. Sometimes, when chicks are transitioning from sleeping on the floor to sleeping on the roosts, they start sleeping in the nests and get stuck in that habit. Usually they continue on to the roosts but not always, even if your roosts are higher than the nest boxes. If they are in the habit of sleeping on the roosts, you don't need to worry about it. If they are sleeping in the nests, you need to worry about it.
In any case, I'd open the nest boxes up and put fake eggs (golf balls work well) by the time they are 16 weeks. It is possible they can start laying that young. Not really likely but possible. You do want them to get in the habit of laying in the nests and not somewhere else. Also, if you open them at 16 weeks and they then start sleeping in the nests, you probably have time to work on that problem before they start to lay in dirty nests.
Also, how long should we wait before allowing them to free range outside of the run while we are outside?
Pure personal preference. Once they have lived in the coop for a week or so, they should have accepted it as home and should return there at night to sleep. The problem is that they can be hard to get back in the coop or run before bedtime. You can teach them to come to a treat bucket or such, but that is not always 100% successful with all chickens. And they don't herd real easily. A normal way to do this is to let then out about an hour before bedtime so you and they can get used to them being out, yet they soon put themselves to bed.
I personally wait until they are about 8 weeks old, on the theory that they are getting to be a bit bigger and not such hawk attractors, although a hawk can take a full grown chicken. Some people take chicks less than a week old out for very closely supervised time on grass. My broodies sometimes wean chicks as young as 4 weeks and these then free range with the rest of the flock without Mama's protection. I don't worry about them,, but Mama taught them to take care of themselves much better than my brooder raised chicks. As I said, pure personal preference.