Gov. Rosselló, through an executive order in late July, raised the minimum hourly wage on government-funded construction to $15 an hour from $8.25. He argued the move would coax laborers into the building industry and persuade workers to stay in Puerto Rico rather than migrate to the mainland U.S.

The construction industry is reckoning with rising costs. Not only have wages increased, but material costs have risen since the Trump administration imposed tariffs on steel and aluminum from Canada, Mexico and the European Union and on Chinese products like home appliances, electrical equipment and other materials critical to Puerto Rico’s rebuilding efforts.

Puerto Rico relies heavily on Chinese imports, and 72% of those products are subject to new or additional tariffs implemented this year, according to KPMG LLP, a trade and customs consultancy.

Costlier labor and supplies are upending financial projections and potentially shrinking the number and size of feasible projects, said Stephen Spears, president of the Associated General Contractors of America’s Puerto Rico chapter.

“If you have a $100 million project, you now have a $135 million project,” Mr. Spears said. “All of a sudden, those dollars that were estimated and delegated to us for the reconstruction of the island are going to have much less impact.”

In August Puerto Rico’s oversight board said the new minimum wage could “leak into the broader economy” and apply to work that isn’t covered by federal taxpayers, “making it more costly to undertake the vast amount of private reconstruction required on the island and likely reducing employment of construction workers for private projects.”

Contractors and developers say the new wage level also risks slowing the completion of vital repairs. The governor’s order will raise overall construction costs by between 8% and 20.5% and contribute between 0.5% and 1.2% to overall inflation, according to San-Juan based economic consultancy Estudios Ténicos. Puerto Rico’s oversight board expects inflation to stay below 1.6% through the 2023 fiscal year.

Higher costs mean fewer projects completed each year and a “smaller and weaker private construction sector when the federal funds eventually run out,” according to an Estudios Ténicos study commissioned by Puerto Rico business groups and reviewed by The Wall Street Journal. One government project to improve roads in western Puerto Rico will cost 24.75% more because of the new wage mandate, Estudios Ténicos found.

While Puerto Rico’s $15 hourly floor applies only to public construction, both supporters and critics say the effects could extend to the private sector, forcing small businesses’ to raise wages to retain workers and potentially compelling some to consolidate.