IMO, the first thing you have to consider, with any retro, is how "original" do you want to go. Sounds like you're there, you don't need to track down all Colt parts.
The second thing, specific to an XM177E2, is how "authentic looking" do you want to go. An E2 had an 11.5" barrel with a moderator; this did not add up to the 16" of barrel length that the ATF requires for a civilian rifle. So, if you want the authentic E2 look, you are in SBR territory. Your other option is to go with a longer barrel (approximately 12.7" assuming a 5.5" faux moderator) and have them pinned and welded to make the ATF happy, but you'll have people telling you the barrel is too long and it doesn't "look right."
(EDIT: forgot to add the pistol option as opposed to SBR. The problem with this route is that there really isn't a "factory" pistol brace that looks good on a retro. A member here is 3D printing one, but his availability is limited.)
At the end, my advice is always, "you do you." If you don't want to (or can't for some reason) mess with an SBR, then build it 16".
For the record, I went the non-SBR route; at the time I was planning my upper, my state did not allow SBR's, and by the time that was changed, I already had the barrel, so I wasn't gonna change.
Brownell's slickside upper, Brownell's 12.7" barrel, Brownell's faux moderator. Pin & weld by JT at Retro Arms Works. The barrel is a 1:12, if I remember right; this was the first run of these barrels they did, where they goofed up and put a triangular handguard cap on. I bought one as a "blem," since I wanted a 607-style carbine-length triangle handguard anyway. So mine looks even less "right."