On a heavy duty sheet of foil, place potatoes, onions, peppers and sausage. Season with salt and pepper. Sprinkle with olive oil and top with butter. Tightly seal around the ingredients, leaving a small opening at one end. Pour water into the opening and seal.
Place the foil packet on the grill. Cook for 20 to 25 minutes, turning once, until sausage is browned and vegetables are tender.