This paper presents a method for designing residual generators using minimum-order functional observers to detect actuator and component faults in time-delay systems. Existence conditions of the residual generators and functional observers are first derived, and then based on a parametric approach to the solution of a generalized Sylvester matrix equation, we develop systematic procedures for designing minimum-order functional observers to detect faults in the system. The advantages of having minimum-order observers are obvious from the economical and practical points of view as cost saving and simplicity can be achieved, particularly when dealing with high-order complex systems. Extensive numerical examples are given to illustrate the proposed fault detection scheme. In all the numerical examples, we design minimum-order residual generators and functional observers to detect faults in the system.