Quantification of the amount of redundancy in a looped water-distribution network is necessary in order to compare different designs and to use an optimization approach in the design of the system. In this work, redundancy is quantified using the expected shortage due to failure of individual pipes as a surrogate measure of reliability that permits incorporation of some considerations of frequency, duration, and severity of damage. Based on this surrogate, a gradient-modified linear-programming model is developed for minimum-cost design subject to reliability constraints. The model constrains the shortage at each node in the network to be less than or equal to some specified fraction of demand. A solution approach is proposed to overcome computational complexity, and is shown to bring practical-sized network solutions within reach. The model is used to explore the trade-off between cost and reliability. An extension of the algorithm considers storage tanks within the system.