Does hardness work as damage reduction, reducing the damage taken by the object each time it is hit, or does it work as bonus hitpoints? I think it's the former, but I'm not sure.
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Your thought is correct. Per the hardness rules:
So any time the object takes damage, subtracts its hardness first. This is similar to how damage reduction works.
Yep, no matter how many times a Str 10 commoner attacks a castle wall with sling bullets, it still isn't going to fall over.