Yorkshire Water said is bound by a legal requirement imposed by the Drinking Water Inspectorate – the independent regulator of drinking water quality – to carry out the work.
The properties near Lower Gorple Reservoir, Heptonstall, near Hebden Bridge, were previously owned by Yorkshire Water and sold in the 1990s when the then residents got the right to buy.
Currently they get water from an old spring near the reservoir dam which is filtered and pressurised.
Resident Daniel Brook admitted that “it does seem a lot of money”.
He said the water tasted good but quality regulations were being improved and it now did not meet current standards.
A Yorkshire Water spokesman said: “The Drinking Water Inspectorate have asked us to do this and if we did not comply we could be fined.”
The work started on Monday and involves laying more than three miles of new pipe.
Sue Pennison, of the inspectorate, said: “Our concern is that everyone receiving water from a water company is entitled to a safe supply. The properties had historic arrangements for their supplies which meant they were at risk of receiving water that was a potential risk to human health.
“Yorkshire Water was aware of this but this had not been remedied and consequently the inspectorate has required that improvements are made to the supply.”