As mentioned in the comments, to harvest a project, you must specify the project's file path:
"$(WiX)bin\heat.exe" project "..\Web\MyProject.csproj" -gg -g1
-cg PACKAGEFILES -sreg -dr DEPLOYFOLDER -out "$(ProjectDir)Frags.wxs"
Be aware that heat does not support harvesting referenced assemblies in 3.7. According to this bug, it will be added in 4.0.