Plywood is a poor substitute for drywall. It is more expensive, isn't fire resistant and can buckle under changing moisture conditions. It offers a wood-grain look for your walls that drywall doesn't, however, and many people choose plywood panels over drywall for just this reason. If you choose to install plywood or want to touch up an existing plywood wall rather than replacing the plywood with drywall, be aware of the limitations of plywood.
Standard drywall is naturally fire resistant because it is manufactured with non-flammable gypsum. Beyond the standard, there are two classes, type X and type C, that are even more resistant to burning. Standard plywood has no such fire resistance and local fire codes may prohibit its use for panelling unless you lay it over a backing of drywall. In the absence of such fire protection, a minor incident like a wiring short circuit or an overheated lamp can lead to a major fire and costly damages. You may be able to find wall panelling manufactured with additives to make it fire resistant.
Because plywood is wood, it expands and contracts naturally with changing moisture conditions. As a result, plywood panels can buckle or warp and the edges may curl or separate. The instability of the edges precludes sealing them with tape and mud the way you seal drywall edges, so to hide them, you usually have to cover them with trim, which adds to the cost and complexity of the installation. Two ways to compensate for the tendency to warp are to add extra framing to decrease the separation between fasteners or to use 3/8-inch or thicker plywood.
Unless you are using prefinished plywood panelling or plan to cover the plywood with a clear coat, finishing a plywood wall can be painstaking. If you want to paint prefinished panelling, you usually have to degloss the surface beforehand or the paint won't stick. Hiding the wood grain so the wall has a smooth appearance usually means skim-coating the entire wall with joint compound, which requires a certain degree of skill to do properly, and then priming it. You can, of course, simply paint over the grain and let it show through as a feature of the wall.
A Technique to Make Pre-Existing Plywood Look Like Drywall
Builder Chris Kinnamon describes a technique he used to give existing wood panelling the appearance of drywall on the home improvement website HammerZone.com. He deglossed and primed the panelling then covered the evenly-spaced grooves with self-adhesive mesh drywall tape. He then transferred joint compound to a paint tray and used a paint roller to roll it onto the wall. Rolling over the wall several times, applying less pressure each time, produced a texture that closely resembled real drywall. He recommends priming the texture before painting, or the joint compound will soak up the paint and force you to use more than necessary.
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