Osteoarthritic degeneration of cartilage is a major social health problem. Tissue engineering of cartilage using combinations of scaffold and mesenchymal stem cells (MSCs) is emerging as an alternative to existing treatment options such as microfracture, mosaicplasty, allograft, autologous chondrocyte implantation, or total joint replacement. Induction of chondrogenesis in high-density pellets of MSCs is generally attained by soluble exogenous TGF-β3 in culture media, which requires lengthy in vitro culture period during which pellets gain mechanical robustness. On the other hand, a growth factor delivering and a mechanically robust scaffold material that can accommodate chondroid pellets would enable rapid deployment of pellets after seeding. Delivery of the growth factor from the scaffold locally would drive the induction of chondrogenic differentiation in the postimplantation period. Therefore, we sought to develop a biomaterial formulation that will induce chondrogenesis in situ, and compared its performance to soluble delivery in vitro. In this vein, a heparin-conjugated mechanically robust collagen fabric was developed for sustained delivery of TGF-β3. The amount of conjugated heparin was varied to enhance the amount of TGF-β3 uptake and release from the scaffold. The results showed that the scaffold delivered TGF-β3 for up to 8 days of culture, which resulted in 15-fold increase in GAG production, and six-fold increase in collagen synthesis with respect to the No TGF-β3 group. The resulting matrix was cartilage like, in that type II collagen and aggrecan were positive in the spheroids. Enhanced chondrogenesis under in situ TGF-β3 administration resulted in a Young's modulus of ∼600 kPa. In most metrics, there were no significant differences between the soluble delivery group and in situ heparin-mediated delivery group. In conclusion, heparin-conjugated collagen scaffold developed in this study guides chondrogenic differentiation of hMSCs in a mechanically competent tissue construct, which showed potential to be used for cartilage tissue regeneration. Impact statement The most significant finding of this study was that sustained release of TGF-β3 from heparinized collagen scaffold had chondroinductive effect on pelleted human mesenchymal stem cells (hMSCs). The effect was comparable to that observed in hMSC pellets that were cultured in chondrogenic media supplemented with TGF-β3. The stiffness of scaffolds at the baseline was about 50% that of native cartilage and over 28 days the combined stiffness of pellet/scaffold complex converged to the stiffness of native cartilage. These data indicate that the scaffold system can generate a load-bearing cartilage-like tissue by using hMSCs pellets in a mechanically competent framework.